A Floating Rate May Save You Money

• As defined by InvestorWords.com, a floating rate follows the interest rate and adjusts to its movements. Due to its uncertainty, a floating rate will initially offer lower rates than a fixed rate loan. As a result, if the rates stay low, the borrower can save a lot of money paying less interest than on a fixed rate loan.
  
  

A Fixed Rate is Guaranteed

• Although a floating rate offers a chance at a lower cost, it can also offer the burden of much higher interest. According to the Home Buying Institute, if interest rates were to rise, the cost of a floating rate loan would significantly increase. In addition, the rates can rise to a level where the borrower can no longer afford to pay off his debt. Fixed rate loans lock in a rate for the duration of the loan and help the borrower manage his expenses.
  
  

Bottom Line

• While a floating rate loan may save you money, it comes with a lot of uncertainty. If you believe that interest rates may rise at anytime during your loan, it is better to lock in a fixed rate and maintain manageable payments.