Comparing Fixed vs. Variable Interest Rates for Investment Loans

The decision to get a fixed-rate or variable-rate investment loan depends on a range of factors, including your individual goals and current market conditions.

In this article, we’ll compare both types of loans and explore the impact of interest rates on the overall cost and financial strategy of your investments.

What's in this article?

How do fixed-rate investment loans work?
How do adjustable-rate loans work?
Considerations for fixed-rate and variable-rate investment loans
Explore your investment loan options with Compass Mortgage

How do fixed-rate investment loans work?

A fixed-rate investment loan will have the same interest rate over the entire life of the loan.

For example, if you purchase a property with the intention of generating rental income long-term, you may choose a 30-year fixed-rate loan with an interest rate that will remain the same over those 30 years.

Unless you decide to refinance the loan later, you will have the same rate and monthly payment amount regardless of what is happening in the housing market.

Fixed-rate loans are popular for investors who plan to hold a property long-term, or for those who require stability and consistency with their monthly payments.

Benefits of a fixed rate

Fixed-rate loans aren’t for every investor, but for the right borrower the pros include:

  • Less risky than a variable rate because the rate does not fluctuate based on market conditions
  • Stable monthly payments, which help investors who desire a predictable cash flow for their properties
  • Potential benefit for investors who plan to hold the property long-term or generate rental income for an extended period of time

Overall, it’s easier for the investor to understand the total costs of the loan due to the fixed rate.

Drawbacks of a fixed rate

Fixed-rate loans may be less helpful for investors who require more flexibility. 

Drawbacks of a fixed rate include:

  • Lack of benefit from any decrease in market interest rates
  • May be more expensive over the life of the loan than variable-rate mortgage loans
  • May initially be higher than adjustable rates

Real estate investors who are less concerned about stability and more concerned about maximum savings over the life of the loan may appreciate an adjustable-rate mortgage (ARM).

Ready To Take Your Next Step?

Purchase - Refinance - HELOAN/HELOC(Required)
This field is for validation purposes and should be left unchanged.

How do adjustable-rate loans work?

You may be more familiar with adjustable-rate loans than you think: Credit cards, auto loans, student loans and personal loans are examples of common loans that often come with variable rates.

Variable-rate loans (another name for adjustable-rate loans) adjust based on a benchmark rate or index that is tied to market conditions. Unlike a fixed-rate loan, your payments will adjust over the life of the loan.

ARM loans will often have a lower initial rate than fixed-rate loans. For example, a 5/1 ARM has a fixed rate for five years and then adjusts annually. This initial fixed rate may come with a lower introductory rate.

The lower initial rate is helpful for investors who don’t plan to hold onto the property long-term or those who want to take advantage of the potential for lower rates in the future.

Let’s take a look at the benefits and drawbacks to determine if an ARM loan is right for your investment property.

Benefits of a variable rate

ARM benefits include:

  • Introductory rates often lower than fixed-rate loans
  • Lower monthly payments if interest rates drop
  • May be helpful for borrowers who don’t intend to hold the property long-term

If the investor plans to sell the property or refinance the loan before the initial lower-rate period expires, an ARM loan may be more beneficial.

Drawbacks of a variable rate

On the other hand, it can be more difficult for investors to predict their cash flow long-term due to fluctuating rates.

Other drawbacks of a variable rate include:

  • Risk of increase in monthly payments
  • Chance of more expensive loans in rising-rate environments
  • Riskier than fixed-rate loans due to unpredictable nature

Beyond the benefits and drawbacks of fixed-rate and variable-rate loans, there are numerous considerations for investors to make based on their individual circumstances.

Considerations for fixed-rate and variable-rate investment loans

There is no one-size-fits-all answer to whether a fixed or adjustable rate is right for you.

Take a look at the following factors that should be involved in your decision regarding investment financing.

Investment goals

How do you plan to use the property, and how long do you intend to hold it?

Your short-term and long-term goals should be taken into account when determining whether an ARM loan or fixed-rate loan is best for you.

Generally, fixed-rate loans are more helpful for long-term rental properties because investors can accurately predict their cash flow.

ARM loans can be a better match for short-term properties because investors can take advantage of initial lower rates and then sell or refinance the property before rates begin to adjust.

However, all of this hinges on an investor’s risk tolerance, market trends and the overall economic outlook. In a declining interest rate environment, variable-rate loans might offer the potential for lower payments if market rates decrease.

Risk tolerance

Your risk tolerance largely depends on your financial stability and your ability to navigate a rising-rate environment.

If you are financially prepared for potential interest rate fluctuations and want to take advantage of the potential for lower rates, variable-rate loans may be a good fit for you.

If we are in a period of low, stable interest rates, a fixed-rate loan may make more sense for your investment.

On the other hand, investors may want to lean more toward variable-rate loans in a rising-rate environment with the hope that rates could decrease in the coming months or years.

Explore your investment loan options with Compass Mortgage

Above all else, real estate investors need to be surrounded by a trustworthy, reliable team of professionals who can help them navigate the right options for them.

One member of this team should be an experienced mortgage lender who can offer the personalized, flexible options an investor needs.

The Compass Mortgage team promises to be your partner and advocate throughout every step of the lending process.

With our unique loan commitment program known as Get Committed®, investors are put in the best possible position to win the property they want.

Get Committed® provides a fully underwritten loan commitment and locks in your interest rate even before you find the property you want to buy.

From there, you can close on your loan in as fast as 15 days.

Submit your loan scenario to get started.

Photo by Mikhail Nilov