Fixed rates buy certainty; variable rates buy a discount that may or may not last. The right choice depends on your horizon and how much payment risk you can absorb.
Side by side
| Fixed Rate | Variable Rate | |
|---|---|---|
| Payment predictability | Locked for the full term | Changes with the index |
| Starting rate | Higher | Usually lower (the teaser) |
| Best when | Rates are low or you hold long | Rates are high/falling, or you exit early |
| Common forms | 30/15-year mortgages | ARMs, HELOCs, credit cards |
| Risk holder | Lender | Borrower |
Strengths of each
Fixed Rate — strengths
- Budget certainty for decades
- Protection if rates rise
- Refinance if rates fall
Variable Rate — strengths
- Lower initial payments
- Wins if rates drop or you sell soon
- Caps limit worst-case (on ARMs)
Worked example
A 5/1 ARM at 5.75% versus a 30-year fixed at 6.5% on $400,000 saves ~$190/month for five years — then adjusts. Selling in year four keeps the discount without meeting the risk.
FAQ
When does an ARM make sense?
When your exit horizon is comfortably shorter than the fixed period, or a rate cap keeps the worst case affordable.
Do variable rates have limits?
Mortgage ARMs have per-adjustment and lifetime caps; HELOCs and cards typically track prime with fewer protections.