What You Should Know About Variable Rate Home Loans

by News Guy on January 20, 2013

Interest in variable rate home loans has always been high, but they may not be for everyone.  Variable rate home loans can turn out to be a blessing or a curse for the borrowers that obtain them.  There are a number of differences between a variable rate home loan and a fixed rate home loan that the borrower should be aware of when making their decision.  Here are some things that you should know that could help you make the right choice.

Why Choose A Variable Rate Home Loan?

Many borrowers are looking for a variable rate home loan because it can considerably reduce the amount required to keep the home loan current.  With a fixed rate home loan, the amount of the payment does not change for the entire life of the loan, so the borrower continues to pay the same amount, no matter what.  A variable home loan rate is tied to an index rate that can rise and fall, decreasing the payment every time the index rate falls below the level it was at when you obtained the home loan.  It can also allow a borrower to buy a larger home for the same amount of money that would be required to buy a smaller home using a fixed rate home loan.

Who Should Obtain A Variable Rate Home Loan?

Borrowers that are good with money and have not accepted the maximum payment that they can afford should be able to work with a variable rate home loan easily.  When the index rate does change, it is often incremental, causing slight changes in the payment amounts required to keep the mortgage current.  If the borrower has some breathing room in their budget, these slight changes should not make paying the amount required an issue.  Potential borrowers should review their choices carefully to ensure they are not getting into more than they bargained for.

On the other hand, borrowers who are paying more than 25% of their income on their home loan payments will have a hard time with the variable rate home loan if the interest rate rises.  Because the payments amounts can fluctuate, there is always the chance that the payment will increase past the point of affordability, especially for borrowers who can barely afford the current payment.  Borrowers that are uncertain about their ability to pay if the interest rate increases would do better with a fixed rate home loan.

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