Fixed Mortgage Interest Rate

What Is The Difference Between A Fixed Mortgage Interest Rate And One That Is Not Fixed?

How does a variable interest rate work?

A variable rate does as it sounds - it varies. This means that when you sign up for the loan, you don't really know what kind of interest you'll be paying a year or more down the road. As the nation's economy shifts, the interest rate can shift to match it. This is how the bank or other lender attempts to keep up with an ever-changing economy.

How does a fixed interest rate work?

A fixed mortgage interest rate means that it cannot change for as long as you are paying on the loan. If your interest rate is 5.25% on the day you sign up for the loan, it will be 5.25% on the day you finally pay it off. You are accepting the current rate and saying that it is good enough for you for the life of the loan. This saves you from having to worry about the interest rate, and your payments, spiking up too high at some point in the future.

More options in your favor

When you have a fixed interest rate, this means that the rate can never increase on you. If the market rate goes up, your rate will stay the same instead. The amount of interest you pay from the beginning is the maximum amount of interest you will ever have to pay. However, this is not a two way street. If the market rate were ever to decrease, you are not stuck at your fixed rate. You can refinance your loan and wind up with the new, lower rate. This means that your fixed interest rate can never go up, but it can go down. This is an advantage in your favor instead of the bank's favor.