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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 thirty-year 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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