When you are comparing your mortgage options, you inevitably will choose between fixed or variable interest rate home loans, and each option has its own benefits and drawbacks.   It is important to understand the difference between a fixed and variable interest rate home loan. A fixed interest rate is a type of mortgage that is locked in at a specific interest rate. This means that if, at the time of your loan, the market is at six percent, then your fixed interest rate for your mortgage will be six percent.

On the other hand, a variable interest rate home loan fluctuates with the highs and lows of the market. With this type of mortgage, your monthly payments may be either higher or lower than when you signed your mortgage paperwork.   For example, if the market is at eight percent then the interest rate of your mortgage will be eight percent, but if the market goes down to six percent, so will your mortgage.

The Advantages of Fixed Interest Rate Home Loans

One of the biggest advantages to having a fixed interest rate home loan is the fact that this type of loan is easier to budget; you always know what the amount of your mortgage payment will be. A fixed interest rate home loan is much less stressful when the market becomes volatile and rates skyrocket.   The third advantage of having a fixed mortgage is that you will know exactly what your repayments are for each given period of time.

The Disadvantages of Fixed Interest Rate Home Loans

One of the biggest disadvantages to having a fixed rate home loan is that this type of loan is oftentimes inflexible. If the interest rates happen to go down, you are still left with the higher rate, unless you decide to refinance.   In addition, if the interest rate increases between the time of your application to settlement, your mortgage's fixed interest rate will also rise.   This is true unless you pay a lock-in fee. Remember to ask your mortgage broker or loan officer about a lock in fee if you are considering fixed interest rate loans.

The Advantages of Variable Interest Rate Home Loans

With a variable interest rate home loan, you have greater flexibility. A variable rate home loan usually has more repayment options then with a fixed rate. For example, with many variable interest rate home loans, you can pay as much as you like without penalties.   In addition, on some home loans, you can defer establishment fees if you pay off the loan in full. With a variable interest rate home loan, you can make principle, interest, or interest only payments. After a period of time, the homeowner can also convert a variable home loan to a fixed rate loan for a small fee.

The Disadvantages of Variable Interest Rate Home Loans

The biggest disadvantage to having a variable interest rate home loan is that you are susceptible to the changes in the market rate.   If interest rates go up, so will your payments, and this may make them unaffordable for your monthly budget.   This type of home loan can be hard to factor into your budget, especially if your payment increases with the interest rates.  

With variable interest rate mortgages, you stand to gain more financially, but your risk has also increased significantly.   On the other hand, with fixed interest rate mortgages, your risk is minimized, but you can always refinance (with certain penalties and fees) if the market rate decreases significantly.   To find out more information, visit lendingtree.com. Lending Tree is dedicated to helping first time home buyers and homeowners who wish to refinance find the perfect home loan to suit all of their financial needs. The type of loan that you choose should depend on your budget, income level, and risk tolerance.