Fixed vs. Adjustable Loans

Have you been wondering about the major differences between fixed and adjustable-rate loans?

It’s an important question to ask, as each type of loan can reflect a long-term financial commitment. If either was as simple as the name would suggest, borrowers would have little difficulty choosing between the two. Before you make your decision, it pays to learn the essentials of fixed vs. adjustable loans.

Adjustable Loans

In the early term of an adjustable loan, you will experience lower rates and repayments. This typically allows borrowers to take out a mortgage on a larger property. Current homeowners can also benefit from falling rates without the need to refinance. If you want to invest or save as a homeowner, paying lower rates will give you room in your budget. Are you planning on relocating in the relatively near future? An adjustable loan will give you the freedom to do so without putting yourself under considerable financial burden.

There are potential disadvantages to taking out an adjustable loan. There is always the risk of rates and payments rising significantly. A rise of 5% over the course of a few years is not a number to scoff at when it comes to, perhaps, the most important financial investment of your lifetime. There are annual caps, however, they don’t come into play until after the first change. It’s a hypothetical situation but you could potentially see your rate go through the roof in an economy where overall rates are sky high. Adjustable loans are often complex and not easy for a green borrower to understand. Without the right advice, you could end up in way over your head.

Fixed Loan

With a fixed-rate loan, you have the peace of mind of knowing your rates and payments remain the same. You can sit back and watch as rates rise, without having to worry your payments are going to rise in line with the shape of the economy. It is, therefore, easier to budget securely when you take on a fixed-rate loan. If you are new to the housing market, i.e. a first-time buyer, a fixed loan is often the better option.

There are refinancing concerns with a fixed loan, such as thousands in closing costs. You may not even have the option of choosing a fixed loan if you can’t afford the rates, due to the absence of a rate break in the initial term. Additionally, there really isn’t much opportunity to shop around, as most lenders offer practically the same rates.

Deciding Factors

As already mentioned, people who aren’t planning on settling in a home may benefit more from an adjustable loan. You can save for your future plans without having to worry the future rate change is going to impact your bank balance.
It is important to understand the index that dictates how often your adjustable loan rate will change after the fixed period. That change will usually occur on a yearly basis, however, some adjustable loan rates are subject to adjustment every month.

What is the current state of play with rates? If rates are high, you may want to opt for an adjustable loan, which will allow you to avail of the lower initial fixed rates. However, it is important to consider whether you can afford a steep increase in rates after the fixed term period. If rates are already low, a fixed rate loan makes more sense.

Future Financial Stability

In all cases, your future financial stability should play a major part in the decision-making process. Understanding how each type of loan works is not enough to ensure you will make the right choice. Usually, buying a home is part of an overall life plan which may involve a number of changes that will involve putting a strain on your finances. If you plan on having kids, the home you now love may no longer meet your needs.

A fixed loan will provide you with predictability, so long as your circumstances are not apt to change. That means if you earn the same amount or greater throughout the term, you shouldn’t run into any problems outside of unforeseen circumstances. An adjustable loan is a good investment if you understand the factors that may affect rate changes and use that knowledge to your benefit.

Galaxy Lending Group

At Galaxy Lending Group, we are committed to helping our customers realize financial stability through a supportive service. Our lending team is dedicated to finding the right loan for you, based on your specific circumstances and needs.

Our integrity and experience is an asset to each and every customer who trusts Galaxy Lending Group to offer support in gaining financial independence. If you have any further questions about fixed or adjustable loans, our team is more than happy to steer you down the right path.