Should I go for a Fixed Rate or not?

When deciding on whether or not to go with a Fixed Rate or a variable rate on your loan there are many important questions to ask yourself. First let's look at what the basic difference between a fixed rate and a variable rate are. A fixed rate provides you the security of knowing that your rate will never increase, therefore making your payments fixed as well. A fixed rate offers other advantages also, such as longer terms of the specific loan as well as the ability to pay off your loan earlier by applying additional principal payments when it is convenient. By comparison a variable rate will change based on the current market (which as we all know can be volatile). If the interest rates increase than the payments on your loan will increase also which means that they interest payment will be more than the principal payment and if funds are tight then paying down your loan may become increasingly difficult.

Many variable rate loans are based on a time schedule for the rate adjustments such as a 3/1 which means that the interest rate will stay fixed for three years and then adjust every year for the remainder of the loan. There are many different ratios available, such as 3/1, 5/1 and even a 10/1 but each follows the same basic guidelines. A variable rate may be good for someone looking for a short term loan, as it allows the payments to stay lower and more affordable. However, if you are looking for a long term loan with equal monthly payments than a fixed rate loan is probably the better option.

A few key questions to ask yourself when looking at whether or not to go with a fixed rate versus a variable rate are, (1) do I want this loan for a short term or long term? (2) Can I afford the monthly payments? (3) What are the possible tax advantages of a fixed loan over an adjustable loan?

Many people chose the fixed rate simply because they are more comfortable knowing that their payments will stay stable and not be subject to fluctuation. A fixed rate also allows for better budgeting as an increase in the payment will only occur if the taxes and insurances associated with your loan ever increase. Whereas with a variable loan the payments are set or fixed for a number of years and then subject to increases during the adjustment period.

Deciding whether to go for a fixed rate loan is a personal choice, but one that should be made after care and consideration is made with regards to your own situation. It is advisable to do some research on the rates and programs available before deciding which is right for you.