Mortgage Loan - Variable Rate vs Fixed Rate

A Fixed Rate Mortgage Loan

A fixed rate mortgage loan has an interest rate assigned either when locked in or at closing. The interest rate remains the same for the life of the mortgage loan. If mortgage rates are rising, it is a good idea to lock in a rate when you are approved for a mortgage. If you don't, by the time you get to final closing the rates may have climbed significantly. However, it is difficult to time mortgage rates as they can fluctuate due to various factors.

The advantage of a fixed rate mortgage is that you always know what your payments will be, within a certain range. You may have adjustments for insurance or property taxes, but for the most part the payments will be pretty constant throughout the life of the loan. Since the fixed mortgage rate is at historically low levels right now, many people like the idea of buying in with a fixed rate and not worrying about what might happen to the index later that can drastically change their payments.

A Variable Rate Mortgage Loan

A variable rate loan is one where the interest rate is tied to a particular index and adjusts on a set schedule. There are a variety of mortgage loans with variable rates, not just ARMs. You can have a hybrid loan or a two-step mortgage that adjust after a specified period of time. Be sure to read the terms of your loan so you know when the rate is due to change and how it might impact your monthly payments so there are no surprises in the future for you.

This can be a tough decision. It's hard to predict how the interest rates will react in the future. Talk it over with a financial advisor.

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