Is Adjustable-Rate Financing Better in a Rising Interest Rate Environment?

Posted: October 28, 2022 | By: LendVer Staff –

The question of whether adjustable-rate financing or fixed-rate financing is better may not have you scratching your head—as the benefit of locking in a predictable rate for the long-term may be obvious while the pitfalls of a seemingly volatile rate can be cause for concern. What about in an aggressive rising interest rate environment like the one we are in today—is fixed-rate financing still king?

You may have missed your window…

12 months ago, we were at the bottom of a very long decline in interest rates. Whether you were financing a home, a business, or commercial real estate—rates were low! If you secured fixed-rate financing when rates were bottomed-out, then you made the right move and have likely set yourself up well for the future. If you took out an adjustable-rate loan however, then your interest costs have rapidly risen over the last few months—but don’t fret. Even if you are seeking financing to expand your business or purchase real estate now, you may be in a better position than you think.

Don’t lock in a fixed rate loan now…

Panic may be starting to get the better of you since the concern that rates will keep rising is understandable, but history shows that aggressive rate hikes are usually temporary measures to curb urgent economic issues such as inflation. What you don’t want to do is lock in a long-term fixed rate when interest rates are at their peak, many commercial loans have prepayment penalties and if rates start to slide down then you could pay a hefty price to refinance into a lower rate down the road. Having an adjustable-rate mortgage can be scary for the short term, but gives you the flexibility to ride the wave of unpredictable rate swings, and benefit from downward rate adjustments when economic pressures subside. You may have missed the last low-rate bottom but having an adjustable-rate mortgage now will enable you to catch the next one.

Look at the big picture…

It may be tempting to put your business expansion or real estate investment goals on hold until rates drop back down again, but you might miss a critical opportunity. Because an adjustable rate will usually decrease as benchmark rates decline, and eventually locking in long-term financing and lower rates will be available, you must weigh the cost of what your average interest expense may be over time. If you had adjustable-rate financing with a 9% interest rate for 2 years, and then you were able to secure low-fixed rate financing at 3% for 2 years, your average interest rate over a 4-year period will have been 6%—a historically low rate! If you sat on the sidelines for 2 years because of economic uncertainty (like many of your competitors will do) and let your business stagnate, you could miss the best opportunity to propel your sales beyond your competitors. Tap into low, adjustable rate, no prepay penalty financing that is still available and give your business the boost of capital it needs to launch a ground-breaking marketing campaign, hire more employees, or purchase necessary inventory or equipment.

Loan rates are high, but so are deposit rates…

Let’s not forget the best news about a high interest rate environment is that deposit rates on CDs, checking and savings accounts are higher than ever! Some banks are offering 18-month CDs with APYs as high as 3.79%, and savings accounts with APYs as high as 2.17%. Getting a high rate of return on your reserve capital is a great way to hedge against the rising cost of borrowing. Earlier this year if you had $50,000 in a business savings account you would have been earning close to 0% even though a $50,000 business loan may have been at 5%. Today, it may cost you 8% to borrow that same $50,000, but if you are getting a 3% return on $50,000 of your reserve capital you’re in the exact same place! Working with the right lending and banking partner can enable you to make the most financial savvy decisions for your business.


Interested in accessing fast and affordable business financing? Contact our recommended best commercial real estate & business lender South End Capital.

Interested in earning a maximum APY on CDs, checking and savings accounts? Contact our recommended best business bank account provider Stearns Bank.

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