As Interest Rates Continue To Rise, Is It Better To Choose a Variable or Fixed-Rate Mortgage?

Couple on meeting with financial advisor.
Weekend Images Inc. / Getty Images

As a general rule, most homebuyers are advised to get fixed-rate mortgages because of their predictability. With fixed-rate mortgages, the interest rate is locked in for the duration of the loan, meaning you can plug the same payment into your budget every month.

Retirement at Any Age: Get Top Retirement Tips for Every Stage of Life
Read: Should You Still Buy a Home in Today’s Market?

That’s different from a variable mortgage, also known as an adjustable-rate mortgage (ARM), in which the interest rate will change over time — and change your monthly payment as well. These are considered riskier because your rate could go much higher after several years.

However, there are times when you might be better off choosing an ARM. As a blog on the Charles Schwab website pointed out, adjustable-rate mortgages usually have an initial fixed rate for a certain period of time, such as five to 10 years. The initial rates are typically lower than the average so that lenders can lure more borrowers. An ARM might be a good option if you get a low introductory rate and plan to pay off the loan or sell the home before the interest rate changes.

Save for Your Future

An ARM might also be a good option when interest rates are moving higher (like now). Again, this is because you start out with a lower-than-average initial rate.

When overall rates rise, ARMs have two potential benefits. First, your initial rate is lower than what you might otherwise get with a fixed-rate mortgage. Secondly, your rate will go down when overall interest rates go down, which typically happens following periods of aggressive interest-rate hikes.

In contrast, with a fixed-rate mortgage you are stuck with the same high rate throughout the life of the loan unless you refinance.

Take Our Poll: Do You Think You Will Be Able To Retire at Age 65?

Demand for adjustable-rate mortgages has risen in recent months as interest rates for fixed-rate mortgages hit their highest level in a decade. The average contract rate on a 30-year fixed-rate mortgage climbed by 7 basis points to 6.01% for the week ending Sept. 9, Reuters reported, citing data from the Mortgage Bankers Association. That’s the highest rate since the end of the financial crisis and Great Recession.

You can expect interest and mortgage rates to push even higher in coming months. As Reuters noted, continued high inflation likely means the Federal Reserve will approve a third straight 75-basis point interest rate hike at its next policy meeting, scheduled for Sept. 21, 2022. Such a hike will likely make adjustable-rate mortgages even more alluring to new homebuyers.

Save for Your Future

More From GOBankingRates

Share This Article:

facebook sharing button
twitter sharing button
linkedin sharing button
email sharing button
Save for Your Future

About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
Learn More


See Today's Best
Banking Offers