Variable v Fixed Rates

Q: Should the Variable rate scare me?

Possibly: the variable rate means that in the AIO, there is a chance that you could end up paying a fortune in interest. But don’t forget: in any conventional, 30 year, fixed-rate loan, you are absolutely guaranteed to pay a fortune in interest.

If you asked to borrow $100 and I said, “Sure, but you have to pay me back $149,” you’d balk at the 49% interest rate. But if I spread that $49 of interest out over a 30 year term, that’s actually me only charging you a 2.875% interest rate. (A 4% loan would be $172.)

Say you were able to get a low 2.875% mortgage, fixed for 30 years, on a $400,000 loan. That’s a great rate and a horrible deal. You’ll be paying nearly 50% more than whatever you borrow over the life of that loan. ($197,000 in interest, to be exact.) It’d beat a 4% fixed for sure–that’d cost you 72% in interest–$287,500.

This is why we suggest thinking through interest costs, not just interest rates.