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A: Variable rates will be lower, often much lower than fixed rates. The price, however, is that you are exposed to the risk of higher rates, possibly much higher rates if general interest rates rise. Variable rate loans may have a short term fixed rate and then go up as the index rate increases. Different loans use different indexes such a cost of funds or 10 year Federal Treasury bonds. Some variable rates offer a ceiling so that the rate you pay will never go above a certain level. However these both cost more and the ceiling is often very high.

You may have no choice as to fixed or variable if the loan amount you need is such that you can only afford to borrow it using the lower variable rate. In this case you MUST plan on the rate increasing over time and expect to have income increases sufficent to make the higher monthly payments. i If not your payments could increase beyond you ability to pay and you could default.

Fixed rate loans have a higher interest rate but less risk since you always know what you payment will be. This is much safer and affords peace of mind you many people. It is a personal decision how much risk you are prepared to take.

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