Variable interest rates: A guide

This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not currently offer Home Equity Lines of Credit (HELOCs) in all states. Please talk with a Home Lending Advisor to see if HELOCs are available in your state. Any information described in this article may vary by lender.

Quick insights

• Variable interest rates can change over time.
• Changes to variable interest rates reflect fluctuations in the index interest rate.ec-fix-var-apr-jan-25
• In contrast, fixed interest rates don’t fluctuate over time for borrowers.

Some lenders offer loan products with variable interest rates. Unlike fixed interest rates, which remain static over the loan term, variable interest rates can change throughout the loan term. Borrowers who are comfortable with the fluctuations may find lower rates, at least at first.ec-fix-adj-arm-jan-25

This guide explores variable interest rates, their advantages, disadvantages and more.

What is a variable interest rate?

Variable interest rates, sometimes called flexible interest rates, can change over time. Throughout a loan term, variable interest rates can rise and fall. This leads to a higher or lower monthly payment and impacts total interest costs over the life of the loan. Variable interest rates typically come with adjustable-rate mortgages, credit cards and home equity lines of credit (HELOCs).

How do variable interest rates work?

Variable interest rates are tied to an index, such as the Constant Maturity Treasury (CMT) or Secured Overnight Financing Rate (SOFR). As the index changes based on market conditions, the variable interest rate will follow suit.

For example, if a variable interest rate is tied to the prime index, a rising prime rate will push variable interest rates higher.ec-fix-adj-arm-jan-25

How often do variable interest rates change?

Generally, the loan details dictate how often the interest rate attached to your loan can change. Sometimes, an interest rate cap is included, which sets a limit as to how high your interest rate can climb.

For example, with a 7/6 ARM, the initial interest rate remains the same for the first seven years. After that, it will change every six months.

What is the current variable interest rate?

The prime rate is one common interest rate index, and it’s used as a base rate for many loan types. When shopping for a loan, seek out current information on variable lending rates.

What’s the difference between fixed and variable interest rates?

The key difference between fixed and variable interest rates is that fixed interest rates don’t change over the loan term. But variable interest rates can change during the loan term.

For example, a 30-year mortgage with a fixed interest rate locks in your monthly principal and interest payment for the entire loan term. In contrast, a mortgage with a variable interest rate means your monthly payment will likely rise or fall as you pay off the debt.

Fixed vs. variable interest rate: Which is better?

The right choice between a fixed-rate and variable-rate mortgage varies based on your unique situation.

For borrowers who value the benefits of a predictable monthly payment, a fixed-rate loan makes more sense. That’s especially true for homeowners planning to stay in the home for the long term. The locked-in mortgage payment can stabilize your housing costs for the long term.

A variable-rate loan could make sense for buyers who are comfortable with fluctuating monthly payments. For buyers planning to stay in the home for just a few years, intend to pay off their loan ahead of schedule or refinance, the long-term risks of a changing monthly payment may not be an issue.

Pros and cons of variable interest rates

Here are several pros and cons of variable interest rates:

Pros

• Low introductory rates: Loans with variable rates tend to offer lower introductory rates for a period.ec-fix-adj-arm-jan-25
• Interest rates can fall: If interest rates fall, your monthly payment may fall due to the attached variable rate.
• Potential savings: If interest rates remain low or fall, borrowers can enjoy savings on interest charges during the loan term.

Cons

• Interest rates can rise: If interest rates increase during your loan term, you can face a higher monthly payment.
• Monthly payments can change over time: With a variable-rate loan, it’s likely your monthly payments will fluctuate over time. This can make budgeting more challenging.
• Consider the risks: A significant increase in monthly payments may challenge your budget.

Although a lower upfront interest rate can reduce payments initially, monthly costs may increase significantly with a variable-rate loan. For some, the risk of higher payments could put pressure on their financial situation.

FAQs

Can I refinance a variable-rate loan into a fixed-rate loan?

For eligible borrowers, it might be possible to refinancerefinance-hl000061 a variable-rate loan into a fixed-rate loan. But eligibility varies based on your financial situation.

How are variable interest rates calculated?

Variable interest rates are tied to an index. When the index changes, the variable interest rate will adjust. For example, if a variable interest rate is tied to the CMT, a rising CMT rate will push variable interest rates higher. The lender will generally include their margin in the calculation, which is the amount they need to charge to cover expenses and turn a profit.ec-fix-adj-arm-jan-25

What is the introductory rate on the variable-rate loan?

The introductory rate on a variable-rate loan is sometimes referred to as the “teaser rate.” It’s usually lower to incentivize borrowers. After this initial period ends, the interest rate attached to the loan can change.

Are variable-rate loans better when interest rates are relatively high?

When interest rates are relatively high, the introductory rate attached to a variable-rate loan can be appealing. But since these loans could eventually come with higher rates, they aren’t necessarily a better option than a fixed-rate loan. Explore the options in the context of your unique financial situation when comparing variable-rate and fixed-rate loans.

In summary

As you explore your homebuying options, understanding variable interest rates can help you choose the right loan structure for your situation. For some borrowers, variable interest rate loans may make sense. Other borrowers might prefer the stability of a fixed-rate loan.

When selecting a loan, weigh the benefits and drawbacks of both interest rate structures to find the option that suits your needs.