I want to get a loan and buy a house. I’ve read plenty of information in banking sites about the interest but i would be grateful if someone could make it clear for me what’s the difference in the fixed and floating interest rate in a 200.000 Euros mortgage loan
In: Economics
A fixed rate means whatever interest rate you agree to at the time you buy is the rate you pay as long as you have that mortgage.
A floating interest rate is one that will go up and down as interest rates in general fluctuate. Here in the U.S. they’re pegged to the Fed’s Prime Rate, over there they may be tied to Libor?
Well fixed rate is fixed and will remain the same for the period of the mortgage. You pay 5% now and in 20 years its still 5%. if market rates go up to 8% you are lucky since you only have to pay 5%. If it drops to 2% you are unlucky and have to pay more compared to others.
Floating means that it is linked to the current market rate. It is 5% now so you pay 5%. Next year it is 2% you pay 2% next year it is 10% you pay 10%.
A fixed rate loan charges you the same interest rate through the life of the mortgage. Your payment (principle and interest only, not including escrow) will stay the same through the loan. A floating rate mortgage gets its interest rate adjusted every so often. This can be good or bad, depending. If interest rates drop, you payments go down. If interest rates go up, your payments go up.
A fixed rate loan is just that. The interest rate is fixed for the entire duration of the loan. A variable rate loan has an interest rate that may fluctuate. It may increase or decrease throughout the duration of the loan. If the economy takes a turn for the worse, the interest rate may increase. If you take a fixed rate you’re protecting yourself against the rate increasing. However you’ll end up paying more should the interest rate drop. Try and find a time line showing the interest rate over the past X number of years. It’ll show you how big the real life fluctuations have been.
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