Should I Take Out a Fixed Rate Home Loan?

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Fixed rate home loans have are a popular type of home equity loan. A fixed rate home loan is a loan that borrowers apply for based on the amount of equity available in their home. The borrower is approved for a specific amount, which he or she will receive as a lump sum, and the loan has a set term and repayment conditions and a fixed interest rate. Borrowers can use the funds from a fixed rate home loan for any purpose they desire.

In order to make the best possible decision regarding whether you should take out a fixed rate home loan, consider these benefits and pitfalls.

Good: Easy budget planning
Fixed rate home loans are attractive to borrowers who prefer fixed monthly payments because these loans enable them to carefully budget their repayment. The loan term generally varies between one and five years, although some lenders offer loan terms up to ten years.

Bad: Early repayment charges
Some lenders will charge you for making early repayment on a fixed rate home loan. If you find youself in an improved financial situation and want to repay the debt early, you will have to pay a fee or continue making payments for the entire term and pay the full interest costs.

Good: Security when interest rates rise
Because fixed rate home loans lock you in at a set interest rate, your loan payments will not increase when interest rates go up.

Bad: No relief when interest rates drop
If interest rates fall below the fixed rate on your home equity loan, the drop will not benefit you because your interest rate is locked in at the fixed rate.

Variable Rate versus Fixed Rate: Savings Analysis

In general, fixed rate mortgages typically cost borrowers more than variable rate mortgages, especially over the long run. According to the Reserve Bank of Australia, borrowers would have saved money with basic variable rate loans as opposed to fixed rate loans 83% of the time. Fixed rate mortgages also frequently carry early repayment penalties, which can further drive up the cost of the loan. Still, fixed rate mortgages are beneficial to borrowers who do not want to depend on the volatility of interest rates and prefer to know the amount of their monthly payment will not fluctuate with the bank rates. Fixed rate mortgages are also advantageous to borrowers who are able to lock in at a time when interest rates are at record lows.

Fixed Rate Home Equity Loans versus Line of Credit Home Loans

Line of credit home loans are another alternative to fixed rate home equity loans. With a standard home loan, you will receive the entire loan amount in one payment and pay interest on the entire loan. With a line of credit home loan, you can borrow only what you need, as you need it, and pay interest only on the funds you have drawn. As you pay down the balance on a line of credit home loan, the money becomes available again, whereas payments on a fixed rate home equity loan will just decrease the amount owed.
Line of credit home loans and have variable interest rates; however, with a line of credit home loan you only pay interest on the funds you have drawn. With a fixed rate home loan, you pay interest on the entire amount of the loan, but your interest rate is predetermined for the life of the loan.

How Do I Decide?

The best way to determine whether a fixed rate home equity loan is appropriate for you is to consider your financial situation.

  • Would you prefer the security of knowing your interest rate will never change? (If yes, you should consider a fixed rate home equity loan. If you would prefer to chance interest rates dropping in the future, you may prefer a variable rate loan.)
  • Are you confident in your ability to budget and repay the loan according to the loan terms? (If not, you may need to consider a line of credit home loan.)
  • Do you anticipate a need to pay the loan off early? (Fixed rate loans often carry prepayment penalties that may increase the cost of the loan.)
  • Are you using the money for an expense in which the costs or fixed or is there a possibility that you will need additional funding? (If the cost is a fixed cost, you may prefer a fixed rate home loan. If the cost could increase or you anticipate needing additional funding in the future, you may prefer a line of credit home loan.)

What to do next

Finance Comparison lists a number of highly competitive home loans that you can apply for online. Simply compare rates, terms and apply online.

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