With interest rates constantly shifting, many investors are asking the same question:
Lock in a rate now—or take the chance that rates improve later?
That decision sits at the core of choosing between a fixed rate mortgage and a floating rate mortgage (also known as an adjustable-rate mortgage, or ARM).
And while the difference may seem small upfront, it can play out very differently over the life of a deal.
Fixed Rate Mortgages
A fixed rate mortgage keeps the same interest rate—and the same monthly payment—for the life of the loan.
Where it tends to make sense:
- When you believe interest rates may rise
- When you prefer certainty over optimization
- When stable, predictable cash flow is a priority
With a fixed rate loan, your largest expense—your debt payment—doesn’t change. That makes it easier to project long-term returns and removes one major variable from the equation.
The tradeoff:
Most fixed rate loans come with a prepayment penalty (PPP).
This means if you sell or refinance within a certain time period, you’ll pay a fee. For many DSCR loans, a common structure is a 5/4/3/2/1 step-down:
- 5% penalty (on the loan amount) in year 1
- 4% in year 2
- 3% in year 3
- 2% in year 4
- 1% in year 5
This can impact your flexibility—and your overall return—if you plan to exit early.
*Please note: PPP structures for DSCR loans can vary by lender. Alternatives include 5/5/5/5/5, 3/3/3, or 3/2/1 step-downs. In some cases, you can choose a no-PPP loan—though these typically come with a higher interest rate.
Floating Rate Mortgages (ARMs)
Floating rate mortgages are essentially the inverse.
The rate is not fixed forever—it adjusts periodically based on market conditions.
Where they tend to make sense:
- When you believe rates may fall (or stay relatively flat)
- When you’re comfortable with more risk
- When flexibility in your exit strategy is important
Because the rate can change, your monthly payment can also change. That makes cash flow less predictable compared to a fixed rate loan.
The upside:
Most floating rate loans do not have a prepayment penalty, giving you more flexibility to refinance or sell when the timing is right.
Why ARMs Often Have Lower Rates
If you’re comparing similar loan options, you’ll often notice that ARMs come with slightly lower interest rates.
That’s because the lender isn’t locking in their return for as long. The longer a rate is fixed, the more uncertainty—and risk—the lender takes on.
That risk gets priced into the loan.
Common Loan Structures
- A 30-year fixed rate (payment never changes)
- A 30-year loan fixed for 5, 7, or 10 years, then adjusts
- A fixed rate loan with an interest-only period (e.g., 10 years interest-only, then 20 years amortizing)
These hybrid options can help balance stability and flexibility.
How to Decide
At the end of the day, this decision comes down to risk tolerance and investment strategy.
There’s no reliable way to predict where interest rates are headed—and rates are just one piece of the puzzle. Insurance costs, property taxes, maintenance, and tenant issues all play a role in your returns.
A fixed rate loan reduces uncertainty.
A floating rate loan introduces flexibility—and potential upside.
Neither is inherently better—it depends on how you want to manage risk.
A Practical Perspective
Personally, I tend to value the peace of mind that comes with a fixed payment. Knowing my cost of debt decades into the future makes it easier to plan and hold long-term.
And while prepayment penalties are a real consideration, they’re temporary. After a few years, you typically regain full flexibility to refinance or sell.
Final Thought
The best loan isn’t just about the lowest rate—it’s about alignment with your strategy.
If you’re evaluating a deal, it’s worth looking at multiple financing options side by side and understanding how each one affects your cash flow, flexibility, and long-term return.
Thanks for reading this week’s Experience, and best of luck in your real estate investing journey!
-BROCK