Should i choose variable or fixed

That's because fixed rates always stay the same, while variable rates can change monthly or quarterly in response to economic conditions. All student loan interest rates are currently near historic lows. If you're comfortable taking a risk to potentially save on interest — and will be able to pay off your student loan fast — consider a variable rate. All federal student loans have fixed interest rates. If you opt for a private student loan, or if you refinance your existing student loans through a private lender, you can typically choose a fixed or variable rate.

Here's how to decide between them:. Fixed rates are locked in for the life of the loan. The only way to change a fixed interest rate is through student loan refinancing. Rates typically start out higher than variable rates. You could miss out on interest savings if variable rates go lower. Consider a fixed rate if. Interest rates are on an upward swing. Variable rates are subject to change throughout the life of the loan. Student loan lenders typically set variable rates based on an economic indicator known as the London Interbank Offered Rate, or Libor.

Lenders determine variable rates by adding the Libor rate to a base rate. If the Libor goes up, your rate goes up exactly that much. Banks use bond yields to cover the costs they incur when financing mortgages.

Read more here: How are mortgage rates set? So, when you choose a 5-year fixed rate mortgage, the bank or lender is essentially taking on all that daily-fluctuation risk for you. Variable rate mortgages are riskier because they're tied directly to the prime rate — but are lower than fixed rates.

During our recent period of historically-low rates overall, more clients are choosing to take the risk. Whether you're applying for a new mortgage, refinancing your current mortgage , or applying for a personal loan or credit card, understanding the differences between variable and fixed interest rates can help save you money and meet your financial goals. A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change.

The interest charged on a variable interest rate loan is linked to an underlying benchmark or index, such as the federal funds rate. As a result, your payments will vary as well as long as your payments are blended with principal and interest. You can find variable interest rates in mortgages, credit cards, personal loans, derivatives, and corporate bonds. Fixed interest rate loans are loans in which the interest rate charged on the loan will remain fixed for that loan's entire term, no matter what market interest rates do.

This will result in your payments being the same over the entire term. Whether a fixed-rate loan is better for you will depend on the interest rate environment when the loan is taken out and on the duration of the loan. When a loan is fixed for its entire term, it remains at the then-prevailing market interest rate, plus or minus a spread that is unique to the borrower.

Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. Depending on the terms of your agreement, your interest rate on the new loan will stay the same, even if interest rates climb to higher levels. On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan. As interest rates fall, so will the interest rate on your loan.

This discussion is simplistic, but the explanation will not change in a more complicated situation. Studies have found that over time, the borrower is likely to pay less interest overall with a variable rate loan versus a fixed-rate loan. However, historical trends aren't necessarily indicative of future performance.

The borrower must also consider the amortization period of a loan. The longer the amortization period of a loan, the greater the impact a change in interest rates will have on your payments. Therefore, adjustable-rate mortgages ARM are beneficial for a borrower in a decreasing interest rate environment, but when interest rates rise, then mortgage payments will rise sharply. After the five years is up, the rate begins adjusting and will adjust each year.

Use a tool like Investopedia's mortgage calculator to estimate how your total mortgage payments can differ depending on which mortgage type you choose. An ARM might be a good fit for a borrower who plans to sell their home after a few years or one who plans to refinance in the short term.