Fixed Rate Home Improvement Loan
Before you finance your home improvement projects, it is important to determine which type of loan rate will work best for you. Are you looking for a fixed rate or a variable rate line? In most cases, you will want to take out a fixed rate home improvement loan, especially if the amount of the loan is more than a couple of thousand dollars.
Unlike a home improvement line of credit, most secured home improvement loans or second mortgages are automatically set at a fixed rate. This means that the loan is repaid in equal monthly installments for a specified length of time. They payments never increase or decrease unless the loan is paid off or refinanced. A home improvement line of credit usually carries a adjustable rate that changes as the index rate changes. This means that interest rate can increase or decrease at any time so you are never sure of what your monthly payment will be.
The biggest benefit of a fixed rate home improvement loan is that you know exactly what your monthly payment will be. You never have to worry that you your payment going up and not being able to afford it. You don't have to watch the interest rates to make sure that your payment isn't going to skyrocket. Finally, because you know exactly what you have to pay, you can plan for future expenses without having to worry about whether or not you will have the money to take care of them.
There are some things to be aware of with fixed rate home improvement loans:
- One drawback is that while your interest rate will never increase, it will also never decrease. For some this is a lost opportunity to save money but compared to the comfort of knowing what your monthly payments will be, this is a small price to pay.
- The interest rate with a fixed rate home improvement loan may be higher than those of other loan options. Due to the fact that the rate never changes, you will probably not get the lowest rate available but at the same time you will not get the highest rate allowed either. The pitfall here is that the higher rate could prevent you from qualifying for the higher loan amount that you might get with the adjustable rate home improvement line of credit.
- The actual monthly loan payment amount will never change unless you use escrow to cover your property taxes or homeowners insurance. If either increases, your monthly payment will also increase accordingly. If you don't use escrow, you never see an increase in the amount you pay monthly.
Having a fixed rate home improvement loan can be very beneficial. You have the piece of mind that comes with knowing that you never have to worry about your payments increasing. For some that guaranteed piece of mind is worth more than what they might save with an adjustable rate line of credit.