Fixed-Rate vs. Variable Rate
A variable-rate mortgage loan has an interest rate that is charged to the outstanding balance based on the changes in market interest rate. These rates are based on the prime lending rate minus a certain percentage. Payments vary depending on market rate fluctuations. While rates are low this may be a good option, but if rates adjust upward it can lead to higher payments.
By contrast, a fixed-interest rate home loan offers security and safety, which appeals to many borrowers in today’s market. A fixed-rate loan charges a borrower based on what rate the borrower “locked into” at the establishment of the loan. Regardless of changes to borrowing rates over the life of the loan, a fixed-rate loan will remain at the rate it was initiated, at and so will your monthly payment.
Studies have found that borrowers are likely to pay less interest overall with a variable-rate loan versus a fixed-rate loan. However, the borrower should consider the duration of the loan because the longer the amortization period of a loan, the great the impact a change in rates can have on your payments. Be aware that if you choose a variable-rate loan your payments can rise sharply and make your loan unaffordable.
Checking your credit report is the first step to securing financing for your dream home. You should know where you stand and what your credit score is before you sit down with a lender. Fix any errors in your report and make sure your score is accurate before you get in too deep into the lending process. If you don’t qualify you may want to consider having someone co-sign a loan with you to help you get a foot in the door (See, “Co-signing – The Pros and Cons”).
