Variable-rate loans, on the other hand, don’t have a fixed interest rate. The rate on the loan fluctuates during the life of the loan. This is because it is tied to a benchmark rate that is set by your lender. When this benchmark rate changes, the rate on your loan, as well as...
If you’re having trouble choosing, you might benefit from a hybrid of fixed- and variable-rate loans. For example, afive-year, adjustable-rate mortgage (ARM)has a relatively low fixed rate for the first five years, but the rate can change in subsequent years. If you don’t plan to k...
For example, before purchasing something, take a moment to think about it. Ask yourself if this purchase is a want or a need. If it’s a want, consider if it makes more sense to wait if you haven’t saved enough for it yet. By first determining how important the variable cost is ...
As the index rates change, the interest rate on a variable-rate loan may change accordingly. That means the rate may increase or decrease. Some variable-rate loans may also have a cap. Caps limit how much the interest rate can change—even if the index rises higher than the cap. When i...
For example, say your neighborhood bakery is famous for its $1 mini muffins. You might normally treat yourself to one muffin each week, spending $4 on average per month, but some months you might indulge more and spend $10 or $15. Some variable expenses fit both scenarios. The cost of...
You Want an Overall LowerCost of Borrowing. Unless market rates rise during the life of your loan, adjustable-rate loans usually have a lower overall cost of borrowing, though the longer the loan term, the more risk there is. For example, a five-year variable-rate home improvement loan is...
Because variable expenses are unpredictable, it may be challenging to track and budget for them. But it’s possible to control how much you spend on these costs. When shopping at the grocery store, for example, you could buy cheaper items or choose only the essentials. Other variable expenses...
Which loan is better: fixed or variable? Both types have their advantages. The better choice depends on your personal situation, financial stability, risk tolerance and future expectations. Why are fixed mortgage rates higher than variable-rate ones?
An example of a loan that combines both fixed and variable rates is the adjustable-rate mortgage. The borrower receives an introductory interest rate for a specific period of the loan term. Afterward, the loan adjusts periodically to reflect the changes in the economy and theFederal Reserve lend...
Limitations to how high or low your rate can go at any single adjustment and over the life of the loan. These are called ceilings and floors. How does a variable rate loan work? Here’s an example of how a variable rate loan works. Home equity lines of credit (HELOCs) are often var...