Question

assume you decide to take a mortgage loan, would you prefer a fixed-rate mortgage or variable rate mortgage? why?  

Answer 1

Sol:

When you take a mortgage loan interest rate is one of the most important considerations. Interest is the cost you have to pay on loans, and the higher the rate, the more expensive your loan will be and vice versa.

When it comes to interest rates for mortgage loan, you have to choose between fixed rate mortgage and variable rate mortgage. Both the loans have their advantage and disadvantage which needs to be considered while opting for either of them.

Fixed rate mortgage - The interest rate stays the same for the entire life of the fixed rate loan. The interest rate will be constant throughout the loan period; therefore the monthly payment will be fixed and won’t change. You will know in advance how much interest you have to pay every month.

Variable rate mortgage - The interest rate is not fixed for the entire life of the variable rate loan. The interest rate will not be constant but will change over time throughout the loan period based on the changes in benchmark interest rate, therefore the monthly payment will be fixed for a certain period of time. The interest payment will fluctuate throughout the life of a variable rate mortgage. It is basically preferred by homebuyers who expect the interest rates to come down.

Deciding between a fixed or variable-rate loan depends upon the following factors,

Fixed rate loans are less risky as you know in advance how much will be your monthly outgo of principle and interest. It is suitable for borrower who prefers predictable payments. Many homeowners choose the fixed rate option because it allows them to plan and budget for their payments in advance. Fixed rate loan will protect the home buyer against any fluctuation of interest rates. However fixed rate mortgage have higher interest rate compared to the initial starting interest rate on a variable- or adjustable-rate loan. This means you’ll be paying more up front for the loan that you take on than you would if you opted for a variable-rate loan.

Interest rates for variable loan will be lower at the start compared to fixed rate mortgage which is an advantage. It is helpful if you’re going to struggle initially to make loan payments but you expect your income will rise gradually, however it is risky than fixed rates loan if the interest rates goes up. You will end up paying higher borrowing cost in the long run and may be at risk of default depending upon how high the rate goes.

So which mortgage loan to take depends upon your preferences, financial situation and risk taking ability. Interest rates for mortgages are at historical lows, so locking into a 30 year fixed rate mortgage will secure affordable repayments. However, a prospective homebuyer looking to sell their house or refinance their mortgage after a few years could benefit from an adjustable-rate mortgage as their lower rates make them more affordable in the short term. You should think about the advantages and disadvantages of both the options, rather than just assuming the lower variable-rate loan is always the best deal.