Fixed-Rate or Variable-Rate?

When you are looking for a loan to refinance your mortgage, should you be looking for a fixed-rate loan or for a variable-rate loan? The answer depends on several different factors.

First, are interest rates at a historically high point or are they at or near historic lows? If interest rates are considered high, and the expectation is that they will go lower in the future, then a variable rate mortgage may have several benefits.

One benefit of a Variable Rate Mortgage is that the initial interest rate is generally lower than it is on a fixed-rate mortgage. This can mean either lower initial payments which can help some homeowners qualify for a loan more easily or else it can mean that you can be qualified for a larger loan and can afford to buy a larger house or a house in a better neighborhood.

A variable rate mortgage with a low start-rate that is fixed for, say, three years (after which time the interest rate on the loan will vary according to current market conditions) can also be excellent for someone who is planning to sell a home at the end of the low start-rate period.

The negative aspect of a variable rate mortgage is that your monthly payment will not be consistent throughout the life of the loan. Rather, the interest rate will fluctuate either up or down depending on market conditions.

A fixed-rate loan, on the other hand, typically has a higher start-rate than a variable rate mortgage but the interest rate and the monthly payment remains constant throughout the entire life of the loan. This consistency can help in long-term financial planning.

Generally speaking, if interest rates are low and not expected to go much lower then a fix-rate loan offers the best protection against future upward movement in rates.