If you’re in the market for a house, you’ll likely need a mortgage. And unless you’re sitting on a large pile of cash, this loan will be substantial.

But it’s not just the dollar amount of the mortgage you need to be concerned with. The type of loan you choose can significantly impact how much money you end up paying.

In this article, you’ll learn the critical differences between the two primary types of mortgages: fixed-rate and variable-rate. More importantly, read to the end to understand which type is likely the best option for you in today’s high-interest rate environment.

So, fixed or variable? Read on to find out.

What is a fixed-rate mortgage?

A fixed-rate mortgage is a home loan with an interest rate that remains constant throughout its life. Put another way, the payment that includes principal and interest will remain consistent for the life of the loan.

How much of that payment goes to principal and how much to interest will change as, over time, the principal amount is reduced. As the principal decreases, the amount of interest (not the rate) will decrease and you will slowly see more of your fixed payment go toward the principal.

This predictability offers borrowers straightforward budgeting but typically comes at a higher cost than a variable-rate mortgage.

What is a variable-rate mortgage?

A variable-rate mortgage, often called an adjustable-rate mortgage (ARM) or floating-rate mortgage, is a home loan with a fluctuating interest rate. The interest rate, and therefore the monthly payments, can change throughout the life of the loan.

These changes are usually driven by changing central bank monetary policy.

  • When the Fed raises interest rates, ARM rates tend to increase
  • When the Fed lowers interest rates, ARM rates tend to decrease

Fixed-rate vs. variable-rate mortgages

Fixed-rate mortgageVariable-rate mortgage
Interest rateThe interest rate remains constant throughout the term.It has the potential to fluctuate throughout the term.
Monthly paymentsMonthly payments remain constant.Payments, like the interest rate, can change—up or down.
Long-term cost predictabilityPayments are consistent and predictable.Payments are less predictable than fixed-rate mortgages.
Starting interest rateFixed-rate mortgages typically have higher initial rates.Variable rates usually start lower than fixed rates.
Best forLow-rate environments.Borrowers who believe rates will remain the same or lower.
RiskLow risk because payments remain consistent. Higher risk because interest rates can increase.
Interest rate capNot applicable.Most variable-rate mortgages will include a cap on the rate of increases.
SuitabilityFor borrowers who desire stability.For borrowers who are comfortable with more risk.

Fixed-rate mortgages: pros and cons

Variable-rate mortgages: pros and cons

Where are interest rates heading?

If this question could be answered with certainty, deciding which mortgage type to use would be easy.

Over the past year and a half, the Federal Reserve has implemented one of the most aggressive tightening campaigns in the organization's history. Since March 2022, rates have risen over 5% during 11 separate hikes.

The severity of the campaign is increasingly leading many market participants to predict a rate softening may soon be on the horizon.

In fact, as of the end of August 2023, 93% of interest rate traders believe the Fed will maintain current rates at the September 20 meeting.

In other words, the overwhelming majority expect a rate pause.

At the same time, Fed chair Jerome Powell has not ruled out further rate hikes. While price growth has dropped substantially from the 9.1% annual rate witnessed last summer, it remains at 3.2%far higher than the Fed’s 2% target.

Powell reiterated at Jackson Hole last month that inflation “remains too high.” As a result, he said, the Fed is “prepared to raise rates further if appropriate.”

So, which type of mortgage should you choose?

Sadly, there’s no crystal ball to determine where interest rates will head in the United States. Choosing between a fixed or variable rate mortgage comes down to a few key questions.

  • Do you expect interest rates to continue rising and remain elevated for some time? If so, a fixed rate makes the most sense.
  • Can you handle fluctuating payments? If you can’t manage an increase in monthly mortgage payments, it’s probably best to stick to the predictability of a fixed rate.
  • Are you risk-averse? If you’re disinclined to take risks, you will likely feel more comfortable with a fixed rate, knowing it will remain constant.
  • How long do you plan to stay in the home? A shorter-term variable rate might make sense if you plan to move within a few years. But a fixed rate might be more appealing if you plan to remain in the house for an extended period.