DeluxeCalc

Fixed vs Variable Interest Calculator

Which interest structure is better?

About this calculator

A fixed-rate loan charges the same interest rate for the whole term, so the payment never changes. A variable-rate loan, called an adjustable-rate mortgage (ARM) for home loans, usually starts at a lower rate and then moves with a market index, so the payment can rise or fall. Which one is cheaper depends entirely on what rates do after you borrow. This calculator lays out one assumed rate path for the variable loan, compares its total interest with the fixed loan, and finds the yearly rate change at which the two cost exactly the same.

How to use this calculator

Enter the Loan Amount, the Loan Term in years and the Fixed Rate you have been quoted. For the variable loan, enter the Variable Starting Rate and the Expected Rate Change per Year in percentage points: 0.25 means the rate climbs a quarter of a point each year, and a negative number means you expect rates to fall. Under Advanced assumptions you can choose how often the rate adjusts and set the Lifetime Rate Cap and Rate Floor from your loan estimate. Every result updates as you type, and the inputs are saved in the page address so you can bookmark or share a scenario.

The method

The fixed loan is a standard amortizing loan, with one monthly payment that repays the balance over the term. The variable loan starts at its starting rate. At each adjustment date the rate moves to the starting rate plus the yearly change times the years elapsed, kept between the floor and the cap, and the payment is recalculated so the remaining balance is repaid over the remaining term. This recalculation is how most adjustable-rate mortgages reset. Total interest is the sum of the monthly interest charges on each loan. The break-even rate change is found by trying different yearly changes and narrowing in, by bisection, on the one that makes the variable loan's total interest equal to the fixed loan's.

Worked example using the default values

A $350,000 loan over 30 years at a fixed 6.25% has a monthly payment of $2,155 and costs $425,804 in total interest. The variable loan starts at 5.5%, so its first payment is only $1,987. With the rate rising 0.1 points a year and adjusting every year, it reaches 8.4% in the final year, and the payment climbs to a high of $2,367. Over the full term the variable loan costs $451,104 in interest, so the fixed rate comes out ahead by $25,300. The break-even rate change is +0.07 points a year: if the variable rate rose more slowly than that, or fell, the variable loan would have been cheaper.

Interpreting the results

The headline tells you which structure costs less under the rate path you entered, and by how much in total interest. The break-even rate change is often the more useful number, because nobody knows the future path of rates. Ask yourself whether rates are more likely to rise faster or slower than the break-even over the life of the loan. The chart shows the payment year by year, so you can see whether the highest variable payment would fit your budget even in a year when it is well above the fixed payment.

Practical tips

The starting discount on a variable loan is worth the most in the first years, when the balance is largest, so a variable rate tends to suit borrowers who expect to sell or refinance within a few years. If you would keep the loan for the full term, compare the break-even with how rates have moved historically rather than with recent months alone. Check the caps in your loan estimate: most ARMs limit the first adjustment, each later adjustment, and the lifetime increase separately, and the lifetime cap here is the most important of the three over a long term. Try a negative rate change and a large positive one to see the best and worst cases before you decide.

Limitations

The rate path is a single assumption, applied in equal steps, while real indexes move unevenly and real ARMs often hold the starting rate for an initial fixed period of 3, 5, 7 or 10 years. The calculator models the lifetime cap and floor but not the separate first and periodic adjustment caps. It compares interest only and ignores points, closing costs, taxes and the value of having a predictable payment. Total interest is not discounted for the time value of money, so interest paid many years from now counts the same as interest paid today. Treat the results as a way to understand the trade-off, not as a forecast.

Frequently Asked Questions

More compare calculators