Fixed vs. Variable Interest Rates

When you start looking for a competitive interest rate for a mortgage, you’ll also want to find favorable terms and conditions associated with that mortgage. Along those lines, one of the most common questions that arises is whether or not a fixed interest rate is better than a variable interest rate. Of course, before this can be answered you should probably understand the difference between the two.

A fixed interest rate is one that stays the same through the duration of the mortgage. In other words, if the interest rate is 8% at the onset of the loan it will stay at 8% until the loan is paid off or refinanced.

A variable interest rate will vary depending on market conditions. As such, this is a gamble that is designed to “beat the bank”. In other words, you may be able to get the interest rate at 5% as opposed to the fixed rate of 8%. However, there is also the risk of the interest rate hitting 12% and turning into a disastrous gamble. If the variable rate spirals out of control you may have the option of refinancing; but this will depend on your personal situation.

Ultimately, the best type of interest rate will be based on your own personal willingness towards risk. For some, a low risk conservative approach is preferred. For others, a more volatile approach may have appeal. Again, the proper option rests ultimately with personal goals and comfort levels.

RSS feed | Trackback URI

Comments »