Fixed Rate or Adjustable Rate? Here’s the Math.

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An article in the latest Wealth Management Report suggests that more people should be using adjustable-rate mortgages. Do you agree?

imagesThe choice between adjustable and fixed-rate mortgages is to some extent a choice of who bears interest-rate risk. You or the bank.

If you have a fixed-rate 15- or 30-year mortgage, you know what your future payments will be. Thus, if you can make those payments on your current income and you don’t lose your job (or have a major personal crisis such as an uninsured illness), you will be able to make your mortgage payments in the future. If interest rates go up, your payments stay the same. Good for you, bad for the bank. If rates go down substantially, you can usually refinance your loan to obtain a lower rate, though the refinancing will require effort and some cost. Thus, fixed-rate mortgages put most of the interest-rate risk on the lender (e.g., the bank).

With a variable-rate mortgage, you bear most of the interest-rate risk. If rates go up, your mortgage payments will be higher. In exchange for bearing more risk, you generally get a somewhat lower initial interest rate on a variable-rate mortgage. If rates change very little or not at all over the life of your mortgage, you will end up paying less than you would with a fixed-rate mortgage.

My advice is that if your mortgage payment is a substantial portion of your income and you expect to live in your house a long time, play it safe and take out a fixed-rate mortgage. If you expect to move in the next few years, a variable-rate mortgage may make sense. If you have enough income that you could easily make the payments if your mortgage went up, then you have a choice.  If you want me to take a look  at your current overall situation to help you make the right choice fill out this short form


Since 2002, (fixed) mortgage rates have dropped from around 7% to around 3.5%. Variable-rate holders have benefited. However, rates can move in both directions. From 1977 to 1982, rates moved from a bit under 9% to almost 17%. Payments on a variable-rate mortgage would have gone up substantially during this period. You shouldn’t make a choice based solely on what happened over the last 10 to 12 years. The future will be different. While rates may stay low in the coming years, they are unlikely to fall much further, and over a 15- or 30-year horizon, there is a good chance they will rise.

Brought to you by Terrance Odean



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