Are you stumped on what kind of home loan you really want? Do you know the difference between a fixed-rate or variable-rate home loan? Stick around and you can not only learn what they are but also figure out which one is best for your situation.

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Let’s take a look, shall we?

Fixed-Rate Home Loans

A fixed-rate home loan has a specific interest rate that will never change no matter how the market goes over time. If you settle on a 4% rate of interest, it will still be 4% ten years into the loan.

The primary advantage of a fixed-rate home loan is the consistency of your payments. Every week or month, your payment will be exactly the same as the interest never changes. This is quite helpful when it comes to budgeting.

The disadvantage of fixed-rate home loans is that you typically settle for a higher than average rate. 4-5% is usually where you will land with a fixed-rate home loan. If you loan $500,000, for example, this will cause you to pay between $20,000 and $25,000 in interest over the years. That being said, at least you don’t risk ending up paying more interest if the real estate market changes for the worse.

Variable-Rate Home Loan

The difference with a variable-rate home loan is that you will start with a lower interest rate that may go up or down depending on the market. You tend to get better rates to begin with; sometimes even as low as 1.5 or 2%.

That being said, there is a chance for your interest rate to go from 2% to 6 or even 7% if things don’t go well. You may pay less interest for a couple of years then end up with a much higher rate for the next few after that.

Which Home Loan Works for You?

If you are confident and find a good variable-rate home loan, you may want to go for it. Do make sure that you save up some emergency funds in the event that the interest rates rise.

If you’re not sure that you would be able to handle an increased interest rate, you may want to go for a fixed-rate home loan. The starting rate of interest may seem a bit steep but it is much easier to manage for the most part.

Read more about best refinance home loans.

Happy house hunting!

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