By financen | April 30, 2018 - 5:16 pm - Posted in Home loans, Loan

Home loan is one of the most important factors when buying a house. This helps you financially to finally make your dream come true. Thus, it is important to choose and decide carefully about the right loan type that will suit you best. Two of the most common loan types are fixed rate and variable home rate.

In this article, we will discuss these two types of home loan including advantages and disadvantages to help you decide which is the best type to apply for. This is very important to make sure that there will be no problem when paying off your mortgage.

Fixed rate home loan

Fixed rate home loan charges “fixed” (thus the name) interest rates that does not change throughout the lifespan of the loan. It does not matter if the cash rates or interest rates are lower or higher for particular month. With fixed rate home loan, you have a fixed amount that you need to pay each month despite all other factors.

Advantages of fixed rate loan

  1. With fixed rate mortgage, borrower is protected from sudden increase of monthly payments in case interest rates rise.
  2. It is easier to understand and remember the amount you owe each amount because the amount is fixed.
  3. It is easier to save and plan your budget since you know the exact amount that you need to pay. You can allot the specific amount so you are sure that when the due date arrives that you have money to pay.

Disadvantages of fixed rate loan

  1. It may be difficult to qualify for a loan especially when the interest rates are high.
  2. It may also be difficult to avail this type of loan if you have less than excellent credit score.

Finding the lowest fixed rate home loan should be your main goal in case you decided to go for this type of loan. Also, be sure that your credit score is excellent.

Variable rate home loan

This type of loan is also known as adjustable-rate mortgage with interest rate that varies over time. The initial interest rate is set below the market rate compared to fixed rate. However, over time, the rate varies depending on the current interest and cash rates so there are chances that it will go high or low.

Advantages of variable rate home loan

  1. The initial payments can be very low.
  2. The borrower can enjoy lower interest rates in case the cash rates and interest rates in the market is low.
  3. Availing loan in this type is easier even for first time borrowers.

Disadvantages of variable rate home loan

  1. Monthly payments may change frequently and significantly.
  2. It can be difficult when the interest rates rise especially if you avail a large amount of loan.
  3. It is more complicated to plan your budget since you do not know the exact amount you need to pay. Sometimes, your estimates might be lower that can ruin your entire budget for the month.

So what is the right type of home loan to avail? It is important that you weigh the advantages and disadvantages. Also, take into consideration your income as well as your lifestyle to know which type of loan is best for you.

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This entry was posted on Monday, April 30th, 2018 at 5:16 pm and is filed under Home loans, Loan. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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