Fixed Rate Loan? Or Variable?

Variable rate loans: The interest rates in these loans are lower compared to fixed rates (not so much lower now that the rates on short term loans have been creeping up close to tong term rates). The payments are lower while the interest rate does not go up drastically and/or frequently. You have loans with options to make interest only payments, which will keep your monthly payments lower. Other options are loans that offer you a minimum payment as low as 1%. This type of loan is very dangerous and you could end up having negative amortization with the minimum payment option. Other options are obtaining a variable loan with a fixed rate period of 2-3-5-7-10 years. At the end of the fixed rate period, the loan goes back to variable. An ARM loan is a good idea if you don’t plan on living in your home for a long time and you have plans to move after a couple of years. In this situation an ARM loan with a fixed rate period might be a good idea.

Fixed rate loans: The interest rates you get are higher than ARM rates. The payments will be the same for the term of the loan 15-30-40 years. This will give you the advantage of always knowing what your payment will be and maintaining the same rate even if interest rates may go up. The monthly payments are higher than the monthly payments on an ARM loan because they require you to make payments that will cover interest and principal payments. The principal of the loan is reduced with every monthly payment. Since you are lowering the principal of the loan your “equity” grows a lot faster. The first years of payments made are applied more towards your amortized interest than the principal but as the years go by, the payments made are applied more towards your principal than the amortized interest.

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November 13th, 2005 · Filed Under Mortgage - Loan Information

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2 Responses to “Fixed Rate Loan? Or Variable?”

  1. Should I refinance or not?? : My Home is My Investment on October 19th, 2007 11:40 AM

    [...] to 5 years ago are now or will face soon this question. These homeowners purchased their homes with adjustable-rate mortgages and low monthly payments but soon they will have to decide whether to stay in their existing loans [...]

  2. ARMs keep getting riskier as time passes by : San Jose-Santa Clara County Real Estate UNCENSORED on December 20th, 2008 2:22 PM

    [...] well as the housing market will put many homeowners in trouble when their fixed rate term on their ARM and interest-only ARM period ends. The monthly payment is likely to jump by 20%, 30% or even [...]

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