The Advantages of a Fixed Rate Home Equity Loan

A fixed rate home equity loan is one of the most popular lending instruments in the market today. While it is popular, it is not the only home equity option out there. In fact, you might be surprised how many options that you really have before you. Another popular type of loan is the variable rate variety. While it might be attractive at first, a fixed rate home equity loan is almost always better in the long run. Here are a few advantages of the fixed rate loan and why you should consider it for your home equity needs.

Easy Budget Planning

When you have a fixed interest rate, this also means that you will have a fixed monthly payment. When they start the loan, they will give you a certain amount of money over a certain period of time. For example, they will give you the money and then you have 10 years to pay it back with interest. This means that you will have 120 equal monthly payments to pay off the balance with interest. 

When you know how much you are going to be spending every month for the next 10 years, it makes your life a lot easier. You can budget into the future and know exactly when you can afford things. For example, let's say that you want to buy a new car after a few years of having your home equity loan. Your new car payment is going to be $400 per month. With a fixed rate home equity loan, you know exactly how much your bills are going to be next month. Therefore, you know exactly how much you can afford to spend on a new car. If you have a variable rate home equity loan, there are really no guarantees. Your rate can go up depending on the prime interest rate. Therefore, you might be able to afford the car for the first year and then your home equity loan payment goes up the next. It makes life a lot less predictable when your interest rate is variable.

Overall Savings

While you might think that you are saving money with a variable rate home equity loan on the front end, it will almost always catch up to you. Most of the time, you will have the home equity loan for at least 10 years. During a time span that long, you will almost always experience some fluctuations in the interest rate. Sometimes, the interest rate goes up much higher than it was when you got the loan. This means that your payment could potentially double in a short period of time. You will then be paying much more interest than you would have with a fixed rate home equity loan. The savings that you thought you were getting are long gone.