Loans with fixed and floating interest rates

Loans with fixed and floating interest rates – You will not go wrong if you assume that the market today offers hundreds of different types of loans to purchase real estate . Received a loan , you begin a special relationship with your lender .

Especially when you consider that the mortgage is issued for a period of 25 – 30 years , these relationships can last much longer than any other .

So again I want to emphasize the importance of selecting the most suitable loan in each case . If you purchase a property to live in it, then you can approach one type of loan , if you are planning to invest in real estate, then , depending on the purpose of your investment , you need a mortgage loan with very different characteristics to consider taxation, the risk involved with investment , etc.

In general , all types of loans can be divided into the following main types :
loans with floating interest rates ;
loans with a fixed interest rate ;
line of credit.
As noted above, there are hundreds of different credits , but they generally are variants of one of the above types.

Floating interest rate

We already know that the variable interest rate may change at any time , but usually such a change occurs , when the National Bank at its meeting decides to change the official interest rate .

Duration of the loan can vary from one year to thirty years , you can repay the loan on a ” body of the loan and interest ,” or choose “interest only ” mode ( where it has an application ) . You may be entitled to make their contributions to pay off the mortgage as often as you desire : daily, weekly, biweekly , or monthly (again , in the event that the lender allows this method of repayment) .

In addition, you may specify the right to repay not only the minimum set that your lender , but also to make additional amounts that will be spent on direct reduction of the loan principal of your mortgage . The main advantages of loans designed for floating rate , on loans that have a fixed rate , include the fact that when the official floating rate goes down , then your floating rate decreases .

Fixed interest rate

If you choose a fixed percentage for your mortgage loan , it means that during the period in which you record the loan will not change neither the interest rate nor the magnitude of contributions to repay the loan nor the period for which the mortgage is recorded . Although exceptions may occur . This will be discussed below, in the same article

Usually , the loan is fixed at one, two , three, four or five years. At least – for seven or ten years . The main advantage of a fixed loan is that the loan is protected from any interest rate growth . From the first day you know exactly how much you will have to make throughout the stipulated period and, accordingly, can plan their expenses during this period .

On the other hand , if the percentage will drop on you it will not change , because you will continue to pay the same amount as before . Although, in this situation, something can be done , as we shall see below. Selecting a fixed rate , you’ll also limited timeframe . For example, if your mortgage is fixed for five years , then you have no right to pay your loan earlier than this date without paying a penalty for early break of contract .

Before fixing your mortgage loan , you need a good understanding of how the system works of penalties in case of early rupture of a fixed loan. This system is based on the fact that in case of falling interest rates , the lender will suffer losses , allowing to pay a fixed loan early , because he will then take the same amount to someone else , but at lower rates .

Each lender calculates the amount of the fine in many ways. It can be pre- agreed amount , or a percentage of the total loan , or a combination of both and more.

In the case when the interest rate begins to rise (say, from 10% to 10.5 %) , then the lender will not particularly mind if the client wants to terminate a fixed contract , because in this case it is released from its obligations under the agreement , according to which he receives only 10 % per annum, while the same amount you can take another borrower at 10.5 % per annum.

There is an unwritten rule that the lender will allow the customer to terminate a fixed loan early , if interest rates rise , without penalty in full. We should not forget that the deadline provided for in advance a fixed loan and the lender makes the customer a favor by allowing terminate the contract early , so a certain amount, covering administrative costs, the customer will still have to pay . And that, in general, fairly.

No rules without exceptions

As a borrower , you have no right to redeem the body of his loan amount is more than the one that is defined by the contract for a fixed mortgage. But there are no rules without exceptions , most lenders may allow you to make additional contributions to the repayment of loans and for a fixed period .

These additional fees may be based on a percentage (say, less than 5% of the loan amount ) , a certain amount ( for example, no more than $ 10,000 a year ), etc. As a rule, the opportunity to make any additional contributions to fixed loans rarely advertised, so if you are considering fixing your credit , be sure to find out and this with your lender.

At the end of the period for which you have committed your credit before you will be a dilemma :
translate a mortgage on a new fixed-term ;
transfer to another type of mortgage loan – floating rate or a line of credit ;
to pay the full amount of the debt ;

pay only a portion of the loan, and the remainder of the lock again or transferred to another type of loan .
As a rule, transfer loans to floating rate , will not cost you anything. But if you decide to fix your loan again or move on to another type of loan (except floating percent ), then you probably have to pay such a transition .