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Finance allah shmoop what's the difference between a fixed and

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a floating rate All right well we'll just start this

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one out with your favorite time Donald and melania need

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to borrow money to buy a building here's the history

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of ten year t bill costs for the last few

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decades Well rates were almost ten percent in the nineteen

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seventies and then they fell all the way to being

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almost free in two thousand eighteen Well if donald had

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borrowed money nineteen eighty to buy a building with us

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fixed rate he'd have had to pay about ten percent

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interest for all this time That raid in nineteen eighty

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was fixed and you know i'd be paying ten percent

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for thirty five years very expensive rent on that money

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It's not like a dog who can't you know have

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pups different kind of fixed you know it's fixes in

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he won't move Position is just a set number fixed

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in place All right well donald would have overpaid massively

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in his loans by paying ten percent interest when he

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could have been paying seven percent here and four percent

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here And maybe like two percent change here if the

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loan he'd taken out in nineteen eighty was floating well

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it would have floated downward along the way like that

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Well most for floating loans have a preset set of

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terms which move along with the rates of the fed

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charges to loan money to banks who then mark up

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the loans a bit and resell the money to really

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borrowers like donald and kill you and me That is

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the floating rate might be set at quote the average

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federal funds rate plus ah hundred faces points over the

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trailing six month period to be reset every month Unquote

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Yeah something like that So in this case his rate

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would have floated downward And obviously things can go the

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other way as well Joe six pack it's a mortgage

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for a home he can barely afford today Eight hundred

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grand mortgage at four percent Well it cost him thirty

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two grand a year to rent that money just the

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interest and he has to make principal payments as well

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So is total payments or something like forty grand a

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year in year one of thirty Well if rates go

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back up and they easily could and become say seven

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Percent instead of that four percent a few years later

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three four five years later Well then all of a

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sudden his cost of renting that money goes from thirty

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two grand a year in interest costs too something like

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fifty or sixty grand a year in interest costs And

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joe six pack because he didn't fix his raid at

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that four percent figure when he borrowed it let things

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float and well he ended up you know living in

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his car when he couldn't afford paying The mortgage owns

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home anymore and had to sell it And so yeah

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he's living in his suv down by the river But 00:02:45.5 --> [endTime] luckily for him that suv floats

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