If you are planning to buy a home soon, you would most likely avail a mortgage for financial assistance. There are different home loan types to choose from and if you’re doing this for the first time, it is important that you weigh your options carefully.
The two of the most common and popular home loan types are fixed rate and variable rate loan. In this article, we will discuss the advantages and disadvantages of each home loan type to help you choose the best home loan type for you.
Fixed rate home loan
As the name suggests, it has fixed interest rate for the duration of the loan. It does not matter if the cash rates are higher or lower for particular month. Find the best fixed rate home loan and you can expect to pay fixed amount per month. Below are the advantages and disadvantages for this loan type.
- Borrower is protected from sudden increase of monthly payments in case the interest rate increase suddenly. So no surprises there.
- Borrower can easily set their budget since the monthly payment is fixed. This way, it is easier to save money to ensure payment every month.
- No need to do complicated math to know your monthly due since as mentioned, the amount is fixed.
- Qualifying for a loan can be difficult especially when the interest rates are high.
- If the interest rate is lower for a certain month, your due will not be affected.
- You need a really good or excellent credit score to qualify for a loan.
Variable rate home loan
Also known as adjustable-rate mortgage with interest rate that varies over a period of time. Usually, the initial interest rate is set below the market rate compared to fixed rate loan type. However, that’s just the initial rate as the rate varies depending on the current interest and cash rate so there are chances that the amount is higher or lower.
- The best part of getting this loan is that the initial payments can be very low compared to fixed interest rate loan.
- Availing this loan type is easier even for first time borrowers.
- Borrower can enjoy lower interest rates in case the cash rates and interest rates in the market is low for a particular month.
- Monthly payments may change frequently and significantly depending on the current interest and cash rates.
- It can be difficult when the interest rates rise all of a sudden most especially if you loan a large amount.
- Budgeting can be challenging since you need to do some estimates whether how much you need to pay for your monthly dues. And of course, you need to make sure that your budget will cover the monthly due.
Now, you have read some of the advantages and disadvantages for both fixed rate and variable rate home loan type so you can choose which is the best for you to avail. It is very important to assess your financial status and lifestyle to ensure that you will get the best type of loan that you can pay comfortably each month.