My July column at Physician’s Money Digest is about how to choose between a fixed and a variable rate loan. I get this question at least once a week, usually referring to student loans, but occasionally to a mortgage. The older I get and the more risk tolerant I get, the more I like variable loans. It helps that interest rates have been falling my entire life, of course. At any rate, take a look and let me know what you think in the comments section below. Here’s an excerpt:
There is a natural hesitancy to having a variable rate loan, because it creates uncertainty in the future. However, it is still often the correct choice in many situations. The real question is not “variable vs. fixed” but rather “variable vs. variable plus an insurance policy.” When you take a fixed interest rate loan, you are essentially paying the lender to run the interest rate risk for you. You are insuring against a rise in interest rates. My general philosophy with insurance is to insure well against financial catastrophes, but to avoid purchasing insurance you do not need because, on average, insurance is a losing proposition. It must be for the insurer to generate a profit from its efforts….
There are really only four situations that can happen with interest rates. In three of these, the variable rate loan outperforms. First, interest rates can remain unchanged, in which case the lower interest rate of the variable loan will cost much less than the higher interest rate on the fixed loan. Second, interest rates can fall, causing the variable loan to become even less expensive. Third, the interest rate can have a small or a slow rise, in which case the variable loan still outperforms the fixed loan. Fourth, the interest rate can rise dramatically and/or quickly, causing the overall cost of the variable rate loan to exceed the fixed loan…
Read the rest of the article here. What do you think? Do you have a variable or fixed interest rate on your student loans? How about your mortgage? Do you regret your choice(s)? Why or why not? Comment below!