• Fixed vs Variable – Which Home Loan to Choose

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    I couldn’t imagine that when we started this blog on New Year’s Day in 2006, that I would ever be writing that we are now homeowners. As far as blogs go ours is fairly ancient. We started out as young-ish 20 somethings with a net worth in the red, and now we’re older, have a family, have a positive net worth, and now own property. Actually, the bank owns the property and we’re borrowing it from the them.

    Is there still a crisis going on?

    Buying a house never really entered our collective brains until recently, and I hadn’t been keeping track of how the mortgage situation was going since the crash of 2008. Were people still being foreclosed upon? Were more homes being built and bought? So off I went to do some research. After realizing that really not much has changed, I plugged in our numbers to various housing calculators and landed on a price of house that both Her and I could agree upon. After that, we went about seeking out vendors to provide to us a home loan. This was harder than we thought it would be.

    Take my money

    On the advice of every financial resource out there, we went comparison shopping to get a loan. We started by getting the recommendations of mortgage brokers from trusted family and friends (as opposed to our shady underground ones, I guess) and started calling around. Weirdly enough, it didn’t really seem like any of them really wanted to talk to me. I would ask about their mortgage products (what a silly term) and they seemed like they were very, very exasperated that I didn’t do my homework. Well then, I’ll do my own homework.

    There’s really only two main options: Fixed vs Variable

    At the end of the day, what you’re looking at are fixed-rate vs variable-rate mortgages. Interest rates in fixed rate mortgages, if you haven’t figured it out by the name, stay constant for the life of the loan, whether it be 5, 15, or 30 years. They’re nice if you don’t like surprises (I generally do, but not BAD surprises) and like to pay the same amount for a very, very long time. Variable rate mortgages have interest rates that can…wait for it…vary over the life of the loan. Of the most well known are the adjustable-rate mortgages, in which the rate low and stable for a short amount of time (a teaser rate), and then changes yearly based on the moon cycles, tides, and the prime rate (okay, only the last one). An example would be a 5/1 ARM, where the interest rate stays fixed for the first five years, then may change every year after that.

    Interest-ing things to consider (haha get it?)

    With a fixed-rate interest mortgage, you’re actually paying less over time, assuming that inflation takes its toll. Also, like I said above, your payment will never change over the life of the loan, which makes cash-flow predictions and budgeting easier.

    With a variable-rate interest mortgage, the increase in interest rate after the initial teaser period might increase your monthly payment to an unsustainable amount. Some may ride out the teaser payment period and try and refinance at the end of the period, but then if you’re doing that then you may have bought too much home. These loans are popular among those who buy homes and flip them, as they assume that they’ll unload the home before the interest rate resets.

    Our decision

    As we were looking for our “forever” home, we didn’t want any surprises in the long run. After I did my due diligence, I decided that a fixed-rate mortgage was right for me and my family. I still called around to find the best rate, and definitely negotiated both the home and mortgage costs. We’ve now been in our home for a few months, and I can say that it’s been the right decision for us.

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