Making a loan with fixed interest or with a variable interest rate? This is one of the most important questions that any person who wants to take a mortgage has. Considering that such a loan spans over a fairly long period, you must know what each type of interest implies, as well as its advantages and disadvantages.
What is bank interest?
When you use the services of a financial institution for a loan, it will charge you an interest rate. Bank interest is the amount of money that a client pays to the lender (bank) for the money borrowed. No institution will give a loan for free. Thus, if you want to use the money that a lender can give you, you must necessarily pay an interest until you return the loan in full.
Bank interest is an instrument that compensates for:
- the risks that the bank takes when granting you the mortgage loan
- the fact that the bank cannot use the money it has lent you, as long as you use them
There are two types of interest: fixed and variable. According to a VA loan specialist Denver homeowners have recommended, both depend on how the amount of money that the bank charges for the loan is calculated, taking into account certain factors.
What is fixed bank interest?
A fixed-rate loan offer refers to the payment of the same amount of interest money over a certain period of the mortgage contract. Whether the reference interest rates, or other indicators that banks take into account change, you will pay the same interest rate that you agreed in the contract with your bank.
In other words, a fixed bank interest allows you to lock in your mortgage for a while. It is offered only for a predetermined period.
If you want to access a mortgage with fixed interest, you should know that the decision must be made together with your lender, taking into account the cost offer at that time. The cost offer is constantly changing, so it will be different depending on the time you decide to lock in your mortgage, as well as the period for which you decide to borrow the money. That`s why you should plan ahead this step.
A fixed interest rate remains unchanged for a pre-determined period of time; this period may vary depending on each bank. The main advantage of a mortgage loan with a fixed interest rate is a higher level of stability, because the monthly payment you have to make will remain the same throughout the period of the offer with fixed interest rate, regardless of whether the benchmarks increase or decrease.
The main disadvantage arises when the reference interest rates fall, while you are on a fixed interest rate, in which case you will not enjoy the saving benefits. That`s why it is best to consider locking in your mortgage when the reference interest rate is already low, at a point from which it will predictably begin to grow.
Fixed-rate loans may be accompanied by some additional clauses, which must be taken into account on a case-by-case basis, for a correct assessment of the total costs of the loan.