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Glossary · Bonds and rates

Fixed vs variable rate

A fixed rate stays the same for the whole loan; a variable (adjustable) rate moves with a market rate, so the payments can rise or fall.

Also called: fixed rate, variable rate, adjustable rate, floating rate, ARM, adjustable-rate mortgage

Live numbers, updated every night

Interest on $100,000 over 10 years at a variable rate
$56,059

Following the prime rate from Nov 2016 to Oct 2026. Fixed at the starting 3.50%: $35,000.

In plain words

Picture two phone plans. One costs $40 a month for two years, guaranteed. The other costs $35 now but can change every month. Loans work the same way: a fixed rate is locked in for the whole loan; a variable rate (also called adjustable or floating) moves up and down with a market rate.

Variable rates are tied to an index, such as the prime rate or a short-term money-market rate, plus a fixed margin. When the central bank raises rates, the payments go up; when it cuts, they go down. Fixed rates usually start a little higher, because the lender takes the risk of rising rates instead of you.

Over the 10 years to Oct 2026, the prime rate ranged from 3.25% to 8.50%. Interest on $100,000 at prime would have cost $56,059 in all, $21,059 more than at the 3.50% it started at, held fixed.

Example

A $300,000 mortgage, fixed or adjustable

  1. Fixed: 6.5% for 30 years. Payment: $1,896 a month, every month.
  2. Adjustable (a 5/1 ARM): 5.5% for 5 years, then reset every year to an index plus a margin. Payment for the first 5 years: $1,703.
  3. If rates have risen and the loan resets to 7.5% in year 6, the payment jumps to about $2,050.
  4. If rates have fallen and it resets to 4.5%, the payment drops to about $1,542.

A fixed rate buys certainty; a variable rate is a bet that rates won’t rise much, and costs less if the bet works.

One level deeper

Adjustable-rate mortgages are named by their fixed period and how often they reset: a 5/1 ARM is fixed for 5 years, then changes once a year. Caps limit how much the rate can rise at each reset and over the life of the loan. Credit cards, home equity lines and many business loans are variable from day one.

Who carries the risk differs by country. In the US, 30-year fixed mortgages are the norm, so a rise in rates hits new buyers but not existing owners. In countries where most mortgages are variable or fixed for only a few years, such as the UK or Australia, higher rates reach household budgets within months.

Bonds have the same split: most pay a fixed coupon, but floating-rate notes reset their interest every few months, so their price hardly moves when rates change. Whether fixed or variable turns out cheaper depends on where rates go, which nobody knows in advance.

Variable vs fixed: the prime rate over the last 10 years

The solid line is a variable rate that follows the prime rate every month; the dashed line is the same rate fixed at its level in Nov 2016. Where the solid line is above, the variable borrower paid more.

Variable: the prime rateFixed at the start
Bank prime loan rate, monthly average, against a rate held at its first month’s level. A model: real fixed rates are usually set somewhat above the variable rate at the start, and real loans add a margin.
The numbers behind the chart
DateVariable: the prime rateFixed at the start
Nov 20163.5%3.5%
Dec 20163.6%3.5%
Dec 20174.4%3.5%
Dec 20185.3%3.5%
Dec 20194.8%3.5%
Dec 20203.2%3.5%
Dec 20213.2%3.5%
Dec 20227.3%3.5%
Dec 20238.5%3.5%
Dec 20247.7%3.5%
Dec 20256.8%3.5%
Oct 20267.0%3.5%

Why it matters

The choice decides who carries the risk of rising rates: you or the lender.

A sudden rise in rates can push variable-rate borrowers into trouble; the resets of adjustable subprime mortgages in 2006 and 2007 helped set off the 2008 crisis.

It changes how fast a central bank’s decisions reach the economy: faster where variable rates are common.

A common mistake

Myth: A variable rate is always cheaper because it starts lower.

In fact: It starts lower because you take the risk that rates rise. If they do, you can end up paying much more than a fixed loan would have cost; if they fall, you pay less. Nobody knows in advance which will happen.

Questions people ask

Which is better, a fixed or a variable rate?

Neither is better in general. A fixed rate gives certainty and protects you if rates rise; a variable rate usually starts cheaper and gains if rates fall. Many people choose fixed for long loans like mortgages, where a payment shock would hurt most.

What is an adjustable-rate mortgage (ARM)?

A mortgage whose rate is fixed for a first period, often 5, 7 or 10 years, and then resets regularly to an index plus a margin, within caps.

Are credit cards fixed or variable?

Almost all US credit cards are variable: their APR is the prime rate plus a margin, so it moves when the Fed changes rates.

Read more on BigCapital

About the numbers

  • The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
  • Bank prime loan rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series MPRIME; retrieved from FRED, Federal Reserve Bank of St. Louis.
  • This page explains a term. It is not investment advice.