When you are looking for a loan, there are a wide variety of options to choose from. Two that we seem to hear about the most are fixed-rate loans and adjustable-rate loans. Fixed-rate loans have a single interest rate that is locked in for the lifetime of the loan while adjustable-rate loans have a separate intro rate for a few years, though can fluctuate over a lifetime depending on a number of variables.
Whenever you apply for a large loan, you’re going to have to pick between these two.
Which one is best for you?
Do You Think You’ll Be Able to Afford an Increased Rate In the Future?
Adjustable-rate loans can fluctuate every year. You may be lucky and get an adjustable-rate loan that drops in a year, saving you some cash. On the other hand, you might get one that increases over the next year. You need to ask yourself,
“Will I be able to afford my loan if the rate increases?”
Remember, your monthly pay will increase with the rate. If the possibility of that scares you, your best bet is to go with a fixed-rate house loan, for which you can easily budget for. The cool thing about fixed-rate loans is that you can always try and refinance them if you pay on time for a while.
How Long Are You Planning On Living In That House?
If you aren’t planning on living in your home for any more than 10 years, your best bet is to get an adjustable-rate loan. Many people move into homes temporarily and end up moving out as life changes (having kids, starting new jobs, etc.). Adjustable-rate loans are ideal and typically have lower introductory rates, making them perfect for paying them off sooner. If you won’t be there for any more than 10 years, you shouldn’t have to worry too much about fluctuation either.
On the other hand, if you are more settled into your life at this point, a fixed-rate might be more ideal.
Can You Afford a Big Down Payment?
If you have a ton of money for a down payment, you won’t have to borrow as much money from a lender or the mortgage company. Essentially, the lender isn’t taking as much of a risk lending you a large sum of money. You have a better chance of getting a lower interest rate if you make a large down payment.
For those who are able to provide big down payments, it might be ideal to lock in a low interest rate at the beginning and keep it fixed over time.
There is no question that taking out a large loan is a massive commitment. Make sure to take all factors into consideration so that you can plan for your future. We hope that this article was helpful in narrowing down your choice.
Do you have any experience taking out adjustable or fixed-rate loans in the past? Let us know about in the comments!