Fixed or Variable Home Loan Rate?

Unless you’ve been living under a rock then you know that the ongoing recession has devastated homeowners all across the country.  Jobs have been lost, homes went into foreclosure, retirement savings were decimated and there’s still much uncertainty about our country’s economic future.  One of the main issues that contributed to the crisis was mortgage loan interest rates.

Many buyers accepted interest rates that were either too high or unpredictable given the above-mentioned state of the market.  This is where greed stepped in on all sides.

Buyers wanted houses they couldn’t afford in a sticky market and lenders saw dollar signs based on the desperation of buyers in their quest for the ultimate American dream: home ownership.  However, this desperation took them places they never thought they’d end up.

In some cases mortgage interest rates were not fixed, but variable home loan rates which meant the payments were unpredictable which left home owners unable to budget properly for any pending changes in the payments.

What are the pros and cons when looking at a fixed vs variable home loan rate?

Fixed rate pros

  • Interest rate will never change over the length of the note regardless if interest rates go up or down.
  • Payment amount (principal and interest) will not fluctuate ever.
  • Security and stability offer peace of mind knowing your monthly mortgage payment is always the same.

If you are planning to stay in your home, a fixed interest rate is better over the long term. Especially if your loan is for twenty or thirty years, as a lot can happen during that amount of time.

Fixed rate cons

  • If rates go down, too bad. If you want to take advantage of the lower rates, you will have to refinance. Only refinance if the interest rate is at least one percent lower than your current loan. Other wise it isn’t worth it.
  • Have to refinance to take advantage of lower rates means paying closing costs again or rolling that into the new loan which eats up your equity.
  • Monthly payments are higher meaning you may not qualify for the home you want.

Variable rate pros

  • Initial beginning rate is very low making those first few years of home ownership easier to manage.
  • If Interest rates go down, so does your payment freeing up some money and also means more of your payment will go towards the principal.
  • Buyer can usually afford more home because the monthly payment is lower.

Variable rate cons

  • If interest rates go up, so do your payments meaning you may have to sell if the rates go high enough making your mortgage payments out of sight.

As you can see, there are several good reasons why one would choose a variable home loan vs fixed rate home loan.  The choice is yours to make depending upon your long term plans and financial goals/present situation.  Make sure you examine each option carefully and while thinking about how you’d handle worst case scenarios.  As with the current recession, many didn’t think it would happen and indeed it did.  Whatever you choose, be prepared for whatever life throws your way.