Should you refinance into a variable rate loan?

John Allen
3 min readSep 9, 2020


Photo by The New York Public Library on Unsplash

It is incredibly common to debate the whole fixed vs. variable rate loan products that are out there in the world right now. Everywhere you look, companies are offering incredible deals if you’re willing to sign up for a variable rate loan, but the fixed-rate doesn’t look nearly as good on the surface of the agreement.

So the question is, will that incredible deal turn out to be truly fantastic, or will it be a lemon a few years down the road?

Follow these easy steps to know which option is right for you.

To know what kind of loan you should get, the first thing you should do is figure out how long your loan will be in place. This should be based on your desire to relocate or to pay off the loan in a realistic time frame.

The one thing that you should not be basing this on is refinancing the loan when the variable rate terms adjust because you may not be able to refinance when that happens. I had several clients who lost their homes during the great recession because they had loans that began to adjust and could not refinance the loans.

If you are looking at a loan that will only be around for a year or two, the rate adjustments will likely not have a significant impact on you, so you should go with the best deal you can do upfront.

Several clients lost their homes during the great recession because they had loans that began to adjust and could not refinance.

Once you know how long the loan will exist, you can figure out if the rate difference will be worth it to take the risk of your loan adjusting down the road. You can do a quick and dirty calculation to figure this out by subtracting the variable rate from the fixed-rate, then multiplying the loan amount by the difference in rates.

This calculation will give you the savings per year that you will experience during the initial variable rate period. You can then multiply that difference by the number of years your initial variable rate loan will be locked.

(Fixed Rate — variable rate) * loan amount = yearly savings

If there is no initial rate lock, then you will need to do a bit more research about where rates are going in the future.

I will save you some time right now by telling you that the Fed said they will not be increasing rates until at least 2023 because of the pandemic, so you should have around three years before rates begin to increase. However, once they start to rise, they will likely move quickly.

If the savings you will get by going with the variable rate option are marginal, it is likely best to go with the fixed-rate option.



John Allen

Bringing clarity and understanding to financial and business topics.