Fixed vs. Variable interest rates: How do they work?

What’s the difference between a fixed and variable-rate loan? With a fixed-rate loan, the interest rate (and in turn: your monthly payment) stays the same over the life of the loan, which can help borrowers budget for repayment. You might pay a premium for this predictability, but good credit could help you secure a low rate.

With a variable-rate loan, the interest rate changes periodically to reflect current market conditions. Typically, there’ll be a cap and a floor that limit how high the interest rate you’ll pay can rise or fall. But if market rates rise, your rate, and therefore loan payment, will increase. If rates fall, you’ll pay less.

Some borrowers prefer the stability of a fixed rate, while others don’t mind risking a rate hike given the potential to save money should rates stay low, or drop.

For more information on this topic, go to LaurelRoad.com.