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Listener Omar Juvera from Los Angeles asks: 

The real estate market is always volatile, with prices and interest rates constantly fluctuating up and down; the market is also bubble prone. I've always wondered, over time, what do studies show is more economical: a (typically higher) fixed rate or (a luring low) variable rate loan?

The average 30-year fixed-rate mortgage dropped to 6.35% this week, its lowest level in about a year.

As consumers gain more power in the real estate market and look around for a home, they’ll have to make a choice between a fixed-rate mortgage, which allows them to make consistent payments, or adjustable-rate loans, which generally start with lower rates, but go up as interest rates rise. 

Like the answer to most of life’s questions, the answer is: It depends. When choosing the right type of mortgage, homeowners should consider how long they plan to stay in their home, their income, and their tolerance for risk, according to experts. 

You should ask yourself questions like: “How important is it for you that your payment stays fixed? How bad would it be if it increases by a couple hundred dollars? How comfortable are you with this uncertainty about your monthly payments?” said Julia Fonseca, an associate professor of finance at the University of Illinois at Urbana-Champaign. 

Even the best formulas can’t predict the future. “There are unknowns about what's going to happen to the economy,” said Jack Liebersohn, an economics professor at the University of California, Irvine. 

From 2010 to 2019, homeowners generally would have been better off taking adjustable-rate mortgages because they had a lower rate. But during the early years of the pandemic, people were better off if they refinanced into a fixed-rate mortgage because interest rates ended up rising, Liebersohn said. 

When might a fixed-rate mortgage be better? 

“The key advantage of fixed-rate mortgages is that, as the name suggests, your interest rate never changes,” Fonseca said. “That means that you know exactly what your monthly payment will be from now until you pay off your loan, and there's no risk that payments are going to increase if mortgage rates go up.” 

If inflation suddenly rises, interest rates will also go up, which means the payments on an adjustable rate mortgage may go up. So a fixed-rate mortgage may be the better choice for households, Liebersohn said. 

“When you get a fixed-rate mortgage, it's like buying insurance against inflation, and you're paying for that insurance over the whole life of the mortgage,” Liebersohn said. 

Some household incomes may go up during periods of inflation because they’re getting Social Security and those benefits are indexed to inflation. But if your income is fixed, then that’s another reason why that fixed mortgage may be the better choice, Liebersohn said.

If you end up choosing this option, make sure to refinance when rates go down. 

“A lot of people leave a lot of money on the table by failing to refinance their fixed-rate mortgages,” Liebersohn said. 

You should consider refinancing when current mortgage rates are 1 to 2 percentage points below your current rate, Liebersohn said. 

Lenders might charge you prepayment penalties if you try to refinance, so you should ask lenders if you’ll have to pay one, Fonseca said. 

When might an adjustable-rate mortgage be better? 

If inflation turns out to be low and stable, then an adjustable-rate mortgage would have been better over the long term because then you’re not paying for that “insurance” that comes with fixed rates, Liebersohn said. 

Homebuyers have to take into account how long they’re going to stay in your home and how long they’re going to keep the same mortgage. 

Adjustable rates are a good choice if you don’t expect to live in the same house for a long time, said Matt Schulz, chief consumer finance analyst at LendingTree. 

Schulz said he and his wife took the risk of getting an adjustable-rate mortgage for the first home they bought because they knew they’d probably move before the higher rate kicked in. 

If you’re looking for an adjustable rate, you should ask your lender what the worst-case rate and monthly payments will look like, Fonseca said.