Fixed Versus Floating: Which Interest Rate Structure Is Best?

 

People eager to purchase their first homes often comb through banks’ websites and fixate on interest rates. Although this can help them get the lay of the land, it can also lead to quite a bit of confusion. Rate structures vary, and rates that seem the lowest might not be the best fit depending on other factors.

Let’s consider the difference between fixed and floating interest rates for home loans. Fixed-rate loans remain steady throughout the life of the loan. Whether the loan is over 10 years or 30 years, the interest rates will never increase or decrease. On the other hand, floating (or variable) interest rates shift depending on the market.

Which Home Loan Is Best: Fixed or Floating?

Unsurprisingly, plenty of people who lived through the Great Recession prefer the dependability of a fixed-rate loan. Only 6% of today’s loans are floating, but they made up 20% of loans in the decade before the recession. Most of the homebuyers I work with gravitate toward fixed options more often than not, as these have been lower in recent years.

However, floating loans do have their benefits. In fact, they afford unique opportunities for certain homeowners to save money. Consider a young professional who has to move every two or three years for her career. In one location, she decides to buy a house knowing she’ll sell it in about 36 months.

She asks plenty of questions about applying for a mortgage, including the difference between fixed and floating interest rates for her home loan. After carefully weighing her choices and working with a trustworthy lender, she takes advantage of the low introductory interest rates on a 20-, 25-, or 30-year floating loan. By the time she relocates again, this savvy homeowner will have saved some money.

Admittedly, the above situation is uncommon. A fixed-rate loan is usually the best fit for my clients. As a mortgage professional, though, I’m happy to walk people through both options to find the best fit for their needs.

Interest Rates Should Be Individual

The above scenario illustrates just how important it is for first-, second-, and even third-time homebuyers to learn everything they can about the interest rate process. This knowledge goes beyond understanding the raw numbers of fixed and floating interest rates for home loans.

For this reason, I never just give a rate or one-word response to questions such as “which interest rate is better: fixed or floating?” I want to know more about the clients. Their credit scores, preferred down payment amount, and intention to buy or refinance are all important parts of the equation. Without this context, the rate I offer might not make sense.

Case in point: I can tell someone our best rate is 3.875% when he has mortgage questions. But if this person carries a low credit score and has recently filed for bankruptcy, this conventional loan rate wouldn’t be applicable. It’s ideal not to hand out a figure without asking questions upfront because the best rate available isn’t always the right rate for the individual.

Separating Fact From Fiction

Let’s consider the rates themselves. Understanding rates can be difficult, and advertised rates aren’t all that they seem. Lenders plug their low interest rates just about everywhere — from the web to radio and TV ads — but there’s usually more to a rate than just the advertised number.

In fact, rates might come with hidden back-end costs or insurance fees that increase the signee’s overall payment. That’s why a great loan officer is always prepared to educate clients about the loan types best suited to their individual needs. Loan type, down payment, credit score, purchase refinance, cash out, term — all of these factors play a role in determining a client’s rate. A seasoned professional keeps these things in mind, which means he or she can also guide clients toward the solutions that best suit their finances.

I had a client call me recently with some questions about mortgages. He requested our best rate, so I gave him the best conventional 20% down purchase rate available. He replied that another bank had given him a better rate. After some back and forth, I realized the bank had told him about a Federal Housing Administration rate.

Although the FHA sometimes offers lower interest rates, it forces the borrower into an upfront mortgage insurance premium. Besides this, it might also require mortgage insurance for the lifetime of the loan. In these situations, looking at the fine print rather than the raw figure is critical. Although his FHA rate seemed more competitive, its hidden costs meant that he might actually pay more in the long run.

Again, interest rate is just one factor in the homebuying equation. Working with an experienced lender is key for securing the best outcome.

Talking to a Mortgage Expert

The mortgage process can be tricky to navigate, even for seasoned professionals. After all, finding the right loan takes in-depth knowledge and some good detective work. Is it any surprise that clients need a helping hand when it comes to understanding fixed and floating interest rates (and the mortgage process in general)?

The good news is that homeownership is on the rise, and American Bank of Missouri is always ready to help clients secure a place to call their own. All it takes is the willingness to ask the right mortgage and loan questions to begin a mutually respectful, financially secure relationship. We handle Conventional, FHA, VA, and are the local expert for USDA financing.

Contact American Bank of Missouri’s mortgage department to talk with our experts and find the interest rate that’s right for you. Connect with our loan officers via phone or email or easily apply for mortgage lending online.

 

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