Fixed Vs Variable Mortgage Rates

Fixed Rate Disadvantages

The security of fixed rate loans comes at a price. At the time a borrower takes out a fixed rate loan, the interest rate is always higher than with a variable rate loan. For example, when the prime rate for fixed loans stands at six percent, prime rates for variables may be around four percent, which translates to a higher mortgage payment. It also means the borrower can afford less in terms of purchase price.

Another disadvantage of these loans is inflexibility. If an individual took out a fixed rate loan at five percent and rates drop to three percent, they must continue paying five percent. Though the borrower can try to refinance, there is no guarantee that he or she will qualify. If the borrower receives approval, there are usually fees, which can eat up many years worth of interest savings. Because of this, refinancing is usually a poor option if the borrower plans to move in the next several years.

Continue to learn about the advantages of choosing a variable rate instead.