Fixed vs Variable Rate Mortgage: Which Costs Less?

The teaser is cheap — the adjustment is where it hurts

The fixed mortgage costs $2,022.62 a month for the whole 30 years — $408,142.36 of interest in total. The variable mortgage starts cheaper at $1,816.92 a month, but after 5 years the rate adjusts to 7.50% and the payment jumps to $2,186.48 — a $369.56 rise. The balance after the teaser is $295,873.93, and the variable’s total interest is $444,960.16 — FIXED wins by $36,817.80. The low teaser rate still loses because the adjustment is steep.

Check the identities: fixed payment = amortizing payment at the fixed APR over the full term; variable first payment = amortizing payment at the initial APR over the full term; balance after the teaser = balance after 60 payments at the initial APR; adjusted payment = amortizing payment on that balance at the adjusted APR over the remaining payments; total interest = payments × months − loan. At the defaults the fixed total paid is $728,142.36 and the variable total paid is $764,960.16. Rounding convention: totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum.

Cumulative paid by year — when the variable falls behind

The cumulative figures are computed from the unrounded monthly payments, so the rounded parts may differ by a cent from their rounded sum. The variable stays ahead until year 11 — at year 11 it has paid $266,442.21 against fixed $266,985.53 — and falls behind in year 12, when it has paid $292,680.00 against fixed $291,256.95.

The worked example, line by line

Setup: loan $320,000.00, fixed 6.50%, variable 5.50% for 5 years then 7.50%, 30 years.

Line 1 — the fixed payment. Amortizing $320,000.00 at 6.50% over 30 years gives $2,022.62 a month. Total interest: $2,022.62 × 360 − $320,000.00 = $408,142.36.

Line 2 — the variable first payment. Amortizing $320,000.00 at 5.50% over 30 years gives $1,816.92 a month — $205.69 less than the fixed payment.

Line 3 — the balance after the teaser. After 60 payments at 5.50% the balance is $295,873.93.

Line 4 — the adjusted payment. Amortizing $295,873.93 at 7.50% over the remaining 300 payments gives $2,186.48 a month — a $369.56 jump from the first payment.

Line 5 — the variable total. $1,816.92 × 60 + $2,186.48 × 300 − $320,000.00 = $444,960.16 of interest. FIXED wins by $36,817.80.

Reverse: the adjusted APR where the 30-year total interests tie is 6.85% (exact 6.8543%); at 6.85% the variable interest is $407,900.18 — VARIABLE wins by $242.18 — and at the exact 6.8543% it is $408,142.36, the tie. The initial APR where the totals tie is 3.76% (exact 3.7587%); at 3.76% the variable interest is $408,170.49 — FIXED wins by $28.13 — and at the exact 3.7587% it is $408,142.36, the tie. The first year the variable costs more is year 12 (variable paid $292,680.00 against fixed $291,256.95); at year 11 the variable has paid $266,442.21 against fixed $266,985.53. The loan amount where the fixed-wins gap is exactly $50,000 is $434,572.41 (exact $434,572.4079); variable interest $604,273.16, fixed interest $554,273.16 — a $50,000.00 gap, and the gap scales linearly with the loan. The fixed APR where the fixed total interest ties the variable is 6.98% (exact 6.9810%); at 6.98% the fixed interest is $444,881.74 — FIXED wins by $78.42 — and at the exact 6.9810% it is $444,960.16, the tie. The teaser length where the variable first wins is 11 years (variable interest $402,089.47 — VARIABLE wins by $6,052.89); at a 10-year teaser the variable interest is $408,708.43 — FIXED wins by $566.07.

Every branch, checked

Adjusted 6.5%: Fixed $408,142.36 ($2,022.62/mo), variable $388,344.08 ($1,816.92/mo then $1,997.76/mo) — VARIABLE wins by $19,798.28. If the adjustment is only to the fixed rate itself, the variable wins — the teaser saving is never given back.

Adjusted 8.5%: Fixed $408,142.36 ($2,022.62/mo), variable $503,752.60 ($1,816.92/mo then $2,382.46/mo) — FIXED wins by $95,610.24. A steep adjustment to 8.5% makes the variable much dearer — the fixed wins by $95,610.24.

Fixed 7.5%: Fixed $485,495.11 ($2,237.49/mo), variable $444,960.16 ($1,816.92/mo then $2,186.48/mo) — VARIABLE wins by $40,534.95. If the fixed rate is 7.5% instead of 6.5%, the fixed payment is $2,237.49 and the fixed interest is $485,495.11 — the variable wins by $40,534.95.

Teaser 10 yr: Fixed $408,142.36 ($2,022.62/mo), variable $408,708.43 ($1,816.92/mo then $2,127.82/mo) — FIXED wins by $566.07. A 10-year teaser almost ties it — the variable interest is $408,708.43, and the fixed wins by only $566.07.

Initial 4.5%: Fixed $408,142.36 ($2,022.62/mo), variable $423,986.59 ($1,621.39/mo then $2,155.68/mo) — FIXED wins by $15,844.23. A cheaper teaser rate of 4.5% still does not win — the variable interest is $423,986.59, and the fixed wins by $15,844.23.

Loan $400,000: Fixed $510,177.95 ($2,528.27/mo), variable $556,200.20 ($2,271.16/mo then $2,733.10/mo) — FIXED wins by $46,022.25. A bigger loan scales everything — the variable interest is $556,200.20 against fixed $510,177.95, and the fixed wins by $46,022.25.

What the defaults assume

The model assumes ONE adjustment only — real variable-rate mortgages adjust repeatedly and have caps and floors, which this model does not include. It assumes no refinance, no resale value, no closing costs, no PMI, taxes or insurance, and that the adjusted rate is an assumption — the break-even moves with it. It assumes the teaser rate holds for exactly 5 years and then the adjusted rate holds for the rest of the term. If the rate never adjusts (adjusted = initial 5.5%) the adjusted payment is $1,816.92 — no jump at all — and the variable interest is $334,092.93, so VARIABLE wins by $74,049.43. If there is no teaser discount (initial = fixed 6.5%) the variable interest is $465,462.85 — FIXED wins by $57,320.49. A $0 loan has both totals at $0.00 — model-level, there is no loan to compare, and the calculator still returns $0.00 rather than an error. Rounding convention: totals are computed from unrounded values, so rounded parts may differ by a cent from their rounded sum; the winner gap is the difference of the displayed (rounded) totals, so the reader can verify it by subtracting the two interest figures; the reverses are nearest-value solutions, and the exact unrounded figures (6.8543%, 3.7587%, $434,572.4079, 6.9810%) are stated wherever the rounded figures appear.

Output · formula · meaning

Who uses this

• The buyer offered a 5.5% teaser against a 6.5% fixed rate: they learn the fixed wins by $36,817.80 — and they check the 6.5% adjustment branch (VARIABLE wins by $19,798.28) to see what adjustment would flip it.
• The buyer who plans to move in 7 years: they learn the variable only falls behind in year 12 — and they check the cumulative table (year 11: variable ahead by $543.32) to see the window.
• The buyer with a $400,000 loan: they learn the fixed wins by $46,022.25 — and they check the $50,000-gap reverse ($434,572.41) to see how the gap scales.
• The buyer choosing a teaser length: they learn the variable first wins at 11 years — and they check the 10-year branch (FIXED wins by $566.07) to see how close 10 years gets.

Accuracy & limitations

The math is first-principles amortization on both sides: fixed payment = amortizing payment at the fixed APR; variable first payment = amortizing payment at the initial APR; balance after the teaser = balance after 60 payments; adjusted payment = amortizing payment on that balance at the adjusted APR. The 4-decimal exact is shown where the rounding matters: the adjusted APR for the tie is 6.8543% (shown as 6.85%); the initial APR for the tie is 3.7587% (shown as 3.76%); the fixed APR for the tie is 6.9810% (shown as 6.98%). What the model cannot do is price YOUR mortgage: it models ONE adjustment only — real variable-rate mortgages adjust repeatedly and have caps and floors — and it leaves out refinance, resale value, closing costs, PMI, taxes and insurance, so the real cost of either side is higher. For the monthly payment itself, see the mortgage payment calculator; for the 15- vs 30-year choice, see the 15-year vs 30-year mortgage comparison; for renting instead, see rent vs buy; and for paying extra on the mortgage, see the mortgage extra payment calculator. This is a calculator, not financial advice.