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Variable rate vs. Fixed rate loans

Anytime you look for a loan, you need to decide whether you are going to get a variable rate or a fixed rate. There are pros and cons to each type of loan, and it’s important to carefully consider your situation, and decide what would work best for your financial situation.

Variable-rate loans

With a variable rate loan, the interest rate changes regularly. Often, the lender pegs the base rate to a benchmark, or prime rate, adding a certain percentage, based on your credit and the type of loan. So, if the benchmark rate is, your variable rate might be +15, or it might be -2. The lender will let you know how often the rate is changed, whether it’s reviewed monthly, quarterly, semiannually, or annually.

As the prime rate changes, your interest rate changes with it. If the prime rate goes higher, your variable home loan, or your credit card, interest rate changes to reflect the changes in the markets. On the other hand, if the prime rate drops, your loan becomes less expensive.

The main advantage of a variable rate loan is that you usually start with a lower interest rate, especially with home loans, than you would see with a fixed-rate loan. This can be helpful if you are looking to start out with a lower payment overall.

However, the problem with the variable rate loan is that it can change. You can’t expect to have the same interest rate throughout the term, and that means your regular payment can change on a home loan. If goes up, you might have trouble affording the cost later down the road, particularly if rates shoot higher. With a home loan, many of those who choose variable rates try to refinance before the interest becomes too expensive.

Fixed-rate loans

The biggest advantage to fixed-rate loans is that you protect against rising interest rates. You lock in a rate now, and it doesn’t ever go up — no matter what happens later with interest rates. Over time, especially if interest rates head higher, a fixed-rate loan can save you money, since you don’t have to pay the rising cost of interest.

Having a fixed-rate loan is advantageous because it means that you can plan for a specific payment over time. It makes it a little easier to plan your budget out since you know that you will always make the same payment.

What should you choose?

With a credit card, you might not have the option; few credit cards these days offer fixed rates. However, you might be able to choose between a variable and a fixed rate for your home loan.

Consider your situation. For some starting out with a variable rate makes sense. These are home buyers who have a fairly solid financial situation, and who are willing to make sure that they build up equity so that they can refinance to a fixed rate if rates start to rise.

For many, though, a fixed rate is preferable at first. It gets rid of the risk that you might not be able to refinance later, and it increases your chances of a lower overall cost over time.

In the end, though, you have to decide what will work best for you, and then go from there.


  1. Rodney Shupe

    To be clear if you can afford the fluctuation a Variable Rate mortgage has always been the better choice over the long term. If you look at historical rates you will see that over ANY 10 tear period of time a Variable Rate will beat Fixed Rates over that period.

    People need to remember that when interest rates climb the fixed rates mortgages usually anticipate that and are higher at the start of the term. Also you often will renew at a higher rate and will maintain a higher rate longer when interest rates are dropping.

  2. Bryan Jaskolka

    I think the only problem with that is that interest rates aren’t going to drop any time soon. Historically, a variable rate has always been the most attractive option; but today, it’s hard to argue against the fixed rate. With interest rates going up by the end of this year – or beginning of next year, at the very latest – rates just aren’t going anywhere but up. Couple that with few being in a very sound financial position because of the high debt-to-income ratio, and again, it’s hard to argue against the fixed right now.

  3. krantcents

    In the U.S. now is a good time to lock in a low fixed rate mortgage for 15 or 30 years. The ARMs offer a lower rate, but it is only good for 5 or 7 years.

  4. Jane Savers @ The Money Puzzle

    If I were starting a brand new mortgage I would lock in for as long as possible at these incredible low rates. It can’t last forever. I was taking 6 month rates in the early 90s when I bought my first house because the interest rates were double digits. 11% for the first 6 months.

    I have a HELOC now and I am waiting for just the right time to jump from a HELOC to a traditional mortgage so that I can lock in at a low rate.

  5. SpeedyLoanSearch

    With a variable rate the interest rates may go up and down over the time you have the loan. You can make early or additional repayments at any time at no extra cost. You can access any additional repayments if you need to. Fees and charges may apply. With a fixed rate the interest rates doesn’t change over the time you have the loan, so your repayments will remain the same. You’ll know exactly what you need to pay each month and be protected from any increase in interest rates.

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