Fixed
Rate vs. Variable Rate Mortgages
When
applying for a mortgage,
the most important thing to you, the consumer, is the rate.
Obviously, you want the best rate you can possibly get, for this alone
can save you a ton of cash in the long run.
Two
types of rates you will be presented with to consider are the fixed
rate and the variable
rate.
The
fixed rate is a rate set in stone, it never moves up or down for the life
of the loan, the only way it can change is if you decide to refinance.
To put it simply, if you have a thirtyyear
term with a fixed rate, your rate will be the same for the entire
thirty years.
A
variable rate is a rate that fluctuates with the prime
rate, and can go up or down, depending on what the prime rate does.
(The variable rate is most common in Home
Equity Credit Lines).
Lets
say you have a variable rate at prime plus one. If the prime rate is at
four, than your interest rate will be at 5% (prime plus one).
Now
if the prime rate goes up to four and one half, than your rate will go
up as well, resulting in an interest rate of 5.5%.
On
the other hand, if the prime rate goes down to 3.5%, than your rate will
go down as well, resulting in a rate of 4.5%.
The
variable rate is more of a risk
than a fixed rate, but it can work in your favor if the prime
rate goes down, however it can also work against you if the prime
rate goes up. So always keep an eye on the market and make your decisions
based on your research.
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