Which statement best describes the difference between fixed-rate and variable-rate mortgages?

Which statement best describes the difference between fixed-rate and variable-rate mortgages?

• A. Fixed-rate changes with the lender's reference rate; variable-rate stays constant.
• B. Fixed-rate is always lower than variable-rate.
• C. Variable-rate includes prepayment penalties.
• D. Fixed-rate keeps constant for term; variable-rate fluctuates with reference rate.

Answer: (D)

Interest rate behavior over the term distinguishes fixed-rate from variable-rate mortgages. A fixed-rate loan keeps the same interest rate for the entire term, so your monthly payments stay constant regardless of what happens in the market. A variable-rate loan, on the other hand, is tied to a reference rate (like the lender’s prime rate or another index); when that reference rate changes, the mortgage rate changes too, causing potential changes in payment amounts or in the interest paid. The statement that best describes the difference directly reflects this: one rate stays constant for the term, while the other fluctuates with the reference rate. It’s also worth noting that fixed vs. variable does not determine which is cheaper or more expensive—the market can move rates up or down. Prepayment penalties are not inherent to variable-rate loans; they depend on the specific loan terms and can occur with either rate type.

Interest rate behavior over the term distinguishes fixed-rate from variable-rate mortgages. A fixed-rate loan keeps the same interest rate for the entire term, so your monthly payments stay constant regardless of what happens in the market. A variable-rate loan, on the other hand, is tied to a reference rate (like the lender’s prime rate or another index); when that reference rate changes, the mortgage rate changes too, causing potential changes in payment amounts or in the interest paid.

The statement that best describes the difference directly reflects this: one rate stays constant for the term, while the other fluctuates with the reference rate. It’s also worth noting that fixed vs. variable does not determine which is cheaper or more expensive—the market can move rates up or down. Prepayment penalties are not inherent to variable-rate loans; they depend on the specific loan terms and can occur with either rate type.