When choosing between a fixed or variable interest rate loan, you should consider the length of the loan, how much you value predictability in your budget, and the current interest rate environment.
A fixed-rate loan has the same interest rate and monthly payment throughout the life of the loan. One reason borrowers, especially those with long-term loans, like fixed-rate loans is that they provide a kind of “interest rate insurance” — they cost a little more, but that premium protects you against price increases down the road.
The variable interest rate on Earnest loans is based on the 30-day Average Secured Overnight Financing Rate (SOFR) as published by the Federal Reserve Bank of New York on the twenty-fifth day, or the next business day of the preceding calendar month, and using the daily interest rate based on actual days in the year and rounding up. The SOFR will then be added to your base rate to set the effective rate beginning on the 1st of the following month. This means that your monthly payment can change as interest rates change since your minimum rate and minimum payment are not locked in as they would be with a fixed interest rate. For more information on SOFR, feel free to view this article here.
We place caps on our clients' effective variable rates to protect them in the event of extreme SOFR change. Currently, the refinance interest rate caps range between 8.95% for a five-year loan term to 11.95% for a twenty-year loan term, and up to 36% for Private Student Loans. The rates could never go above these caps in case a change in the market raises interest rates beyond those limits.
To explore how different rates would affect your monthly payment, check out our rate calculator here.