Loans & debt
Fixed vs. variable interest: Definition, Formula and Example
A fixed interest rate stays unchanged for its specified fixed period; a variable or adjustable rate can reset according to the contract.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Fixed-rate loan; Adjustable-rate mortgage (ARM).
How it works
An adjustable mortgage may use an initial fixed period followed by an index plus a lender margin, subject to applicable floors and caps. A fixed mortgage rate does not fix property taxes or insurance. A calculator using one constant rate does not predict future resets.
Typical adjustable-rate relationship: reset rate = reference index + contractual margin, subject to contractual limits
The index, reset dates, cap structure and amortization rules are contract-specific. Percentage-point changes in a rate are not percentage changes in a payment.
An index reset with a rate cap
Assume a 2.5-percentage-point margin and an initial 5% rate.
- An index of 3% implies 3% + 2.5 percentage points = 5.5% before caps.
- If the next index is 4%, the uncapped rate is 6.5%.
- A hypothetical cap of one percentage point above the current 5% rate would limit that reset to 6%.
The capped illustrative reset is 6%, rather than the uncapped 6.5%.
Hypothetical index, margin and one-reset cap; not an actual ARM offer or a rate forecast.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
A low introductory payment can hide later affordability risk
Refinancing or selling before a reset is not assured. Also distinguish a fixed mortgage rate from credit-card fixed-APR rules, which can permit changes under specified conditions.
Explore with a calculator
- Mortgage Calculator
Compare constant-rate mortgage scenarios; it does not simulate every ARM cap.
- HELOC Calculator
Explore entered-rate draw and repayment assumptions.
- Interest Rate Calculator
Solve a stated payment model’s implied rate.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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