Coming to the lender, the borrower may be unable to decide for himself which of the lending programs he should choose – at a fixed or a floating interest rate. If you do not study the features of these two types of mortgages, then it will not be easy to make the right choice. Therefore, before applying for a loan, it is worthwhile to deal with this issue in more detail.
Fixed interest rate
A fixed-rate is called an interest accrual system in which loan payments throughout the entire term of the loan will be calculated at a constant interest rate. The borrower receives the amount at a specific percentage, which is prescribed in the agreement and does not change during the lending period.
You can change the fixed rate if it is prescribed in terms of the loan agreement. If no such cause is provided, then this issue can be resolved by agreement of the parties involved. To do this, you will need to sign an additional document that will change the terms of the contract.
The fixed-rate is used to minimize possible risks of losses on the part of the borrower. It is worth giving preference to her if you plan to take a long-term loan.
Floating interest rate
The floating rate differs from the previous one in that its value may vary. It includes two components: a base interest rate and a floating indicator, which, when two values are added, makes the final rate floating.
The floating interest rate is linked to one of the money market indicators. Therefore, there is no guarantee that the percentage indicated initially will remain unchanged for the entire loan period.
Features of this type of interest rate:
-the bank has the right to increase the amount of interest in the event of certain circumstances specified in the agreement;
– preliminary calculation is recommended based on the higher limit of the rate;
Features and characteristics of interest rates
Both fixed and floating rates have their positive and negative traits
The main advantage of a flat rate is that it is constant. When a borrower takes out a loan at this interest rate, he can be sure that neither a change in market conditions nor an increase in the base or other index rate will lead to changes in payments.
But it also works vice versa: if the index rates go down and the bank, therefore, reduces the floating rate, then the interest on the loan will remain the same.
If we talk about floating rates, they are mostly lower than the fixed ones. Therefore, the borrower can save money if he can pay off the loan before the interest rises.
It is still better for the long term to choose a fixed rate to minimize all risks. You will receive a stable interest and payments that will not change.
Written by Bader Albader, market researcher.