Home Equity Loans: Choose Fixed Rates or Variable Rates?
Your home can secure valuable extra funds, with home equity loans meaning the end to financial woes. But the choice between variable and fixed interest rates can make it a great or bad deal.
The principal of this kind of loan is that, with every mortgage repayment made, a percentage of the property value becomes the property of the borrower. In effect, he or she has bought back that amount of the home from the mortgage provider. However, that is not to say these loans are perfect.
Like every other loan, they must be repaid with interest and paying the lowest interest makes the deal good. The question is whether to get fixed or variable interest rates. This can sometimes mean major savings, with a reduction in the repayments due each month. This obviously makes home equity loan approval all the better to celebrate.
What Does Fixed and Variable Mean?
There is quite a difference between fixed interest rates and variable interest rates. The most obvious is that fixed means that the rate never changes, so if a rate of 12% is charged on a home equity loan, then for the lifetime of that loan (whether it be 3 years or 20 years) an interest rate of 12% is charged.
Variable rates, however, are affected by markets and any fluctuations that may occur there. What this means is the rate can change from time to time, leaving the borrower susceptible to recession, inflation and other negative influences. This is the key consideration when working out whether to agree to fixed or variable interest rates.
It is essential that this issue is decided upon before getting home equity loan approval. In some cases, lenders will offer both rates, with perhaps the first 3 years of a 10-year loan at a variable rate, before switching to a fixed rates. This is because variable rates are generally lower (though unstable), so borrowers have a chance to make savings early on.
Issues to Consider
Unfortunately, there is little or no stability when considering the future development of economies. Anything can happen, and swings in fortunes can be quite dramatic. So, choosing the best interest rate on a home equity loan is something of a lottery. However, there are some clues worth considering.
The first is the loan term. Interest rate fluctuations over 10 years can be far greater than over 3 years, so a loan what is affordable when taken out could become far too expensive after 5 or 6 years.
For longer terms, the fixed rate is usually seen as the best choice between fixed or variable interest rates. A shorter term (say of 3 years) is likely to have fewer fluctuations, so there is less chance of a loan becoming too expensive.
On the other hand, interest rates might drop below those quotes at the time of home equity loan approval. But this is the gamble that the borrower takes.
Finding the Best Rates Out There
When applying for a home equity loan, your own mortgage provider is a good place to start. Negotiations are more effective between parties that know each other, so lower interest rates are more likely. Of course, this does depend on having a good relationship with them.
Checking on the terms that come with fixed or variable interest rates is also essential before making a decision. Also, look at comparison sites for the best online lenders, though be sure to check those lenders out on the BBB website too.
Getting home equity loan approval should be a reason to celebrate, and making sure the interest rates are the best available is one way to ensure it is.
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ABOUT THE AUTHOR
Mark Venite is the author of this article and a successful financial advisor with 20 years of experience. He helps people to get approved for Bad Credit Personal Loans for 5000 and Bad Credit Student Loans Guaranteed. For more information about his services please visit him at http://www.accessmyloan.com