Fixed or variable interest rate?

When you're preparing to buy a home, you’ll have to consider whether you want a fixed or a variable interest rate. Understanding these options can help you select the best one for your financial situation.

Fixed-Rate Mortgages: A fixed-rate mortgage has a set interest rate that does not change throughout the life of the loan. This stability makes it easier to budget, as the principal and interest payments remain the same. It's an excellent choice if you prefer predictability and don’t plan on refinancing soon. The downside is that fixed rates might be higher than variable rates, but don’t expect this to always be the case.

Adjustable rate mortgages (ARMs): Adjustable-rate mortgages have interest rates that can fluctuate based on market conditions. They are usually fixed for a period of time, and then change regularly on a fixed schedule. The rate is usually tied to an index (WSJ prime rate, for example) with a calculation in your contract stating how much your rate will be. This means your monthly payments can vary, making it harder to budget. However, initial rates for variable mortgages can be lower than those for fixed mortgages, potentially saving you money if rates remain stable or decrease over time. This option might appeal to those who plan to move or refinance within a few years.

Choosing the Right Option: Consider your financial stability, risk tolerance, and long-term housing plans when choosing between fixed and variable rates. Fixed-rate mortgages are suited for buyers who value consistency and long-term planning. In contrast, variable rates can be advantageous for those looking to save initially or who anticipate an increase in income.

Remember, the right choice depends on your personal financial situation and the economic environment. Consulting with a professional lender will help educate you so that you can make the best choice for you.