Is a Fixed or Variable Rate Best for Your Investment Loan?

Fixed vs. adjustable

There are numerous ways to make a big profit in real estate, whether you’re planning to flip homes, purchase more rental properties, or sell rental properties to tenants. However, you need a good amount of capital to do this, so it’s important to know which loans will best meet your needs. Investment lenders in Texas offer both fixed and variable rates on investment loans, so it’s important for you to know about each type to ensure you make the smartest choice. Here’s what you need to know.

Variable vs. Fixed Rates

A fixed rate loan means that you’ll lock in an interest rate that will continue for the life of the loan. Conversely, a variable rate loan has an interest rate that adjusts over time depending on the market trends. Since a fixed rate loan has the interest calculated on the principal at the same rate, the overall payment over the life of the loan never changes. The payment on a variable rate loan will change over time because the amount of interest will change as well. There are some benefits of each type of loan that you, as an investor, should consider.

How Variable Loans Work

A variable loan rate is calculated using a well-known index like the Prime Rate or LIBOR. Typically, a variable loan will be the index rate plus an additional percentage. This additional percentage will depend on your credit score. The better the score is, the smaller the additional margin is. Riskier loans or those with a lower credit score will be give a higher margin by investment lenders. Loans that have a shorter payback term also have higher rates. The payment amount can change monthly depending on the interest rate change because the change in rate changes how much will be owed over the life of the loan.

Variable Loan Cap

It’s important to understand that there’s a cap on a variable loan amount. This is to protect borrowers regardless of how high the index rate goes. The caps are generally set at a higher amount than any borrower would want to pay, but it can be significantly lower than if the rates were to go considerably higher. So the borrower always knows the maximum they’ll have to pay, even with a variable rate.

Loan approval

Fixed Rate Pros and Cons

Perhaps the biggest benefit of a fixed rate loan is that you’ll always know how much your payment will be, regardless of what the market does. These standardized, monthly payments make it easy to work within your set budget without worrying about what the next payment amount might be. It’s a much safer loan for those who don’t want to gamble on market fluctuations. The downside of this type of loan is that you might pay a higher rate than a variable loan.

Variable Rate Pros and Cons

Variable rates almost always start out with a lower interest rate than a fixed rate loan does. This is because it’s a riskier loan, so lenders make it attractive by offering lower interest rates. But this can work well for a borrower or investor who plans to pay off the loan quickly. The obvious downside is the potential for rates to go higher than that of a fixed rate loan.

Deciding on a Loan

As you’ve probably learned, unique situations dictate which type of loan is best. That’s why after carefully considering both types of loans, you should contact Investor Loan Source to learn more and decide what’s best for you.