Here are monthly rates from September 1989 to the present. You can see that the 30 year fixed rate is anywhere from 1 to 5 percentage points higher than the variable 1 month LIBOR. This is so because the fixed rate needs to account for the potentially higher rates that it will forgo if the funds were to be loaned out later date at a higher rate. The 1 month LIBOR is normally close to the FED funds rate and represents the cost of short term funds, so a lender basing his loan products on the LIBOR has less risk of interest rates going up and not being able to take advantage of lending at the higher rate. Thus a loan based on the LIBOR can start out at a lower interest rate. You can see that the LIBOR rates have been as much as 5 percentage points lower than the comparable fixed rate. The FED funds rate is seen as a financial management tool by the FED in combating recession and inflation. So if recession is seen as a problem the FED funds rate will go down. Inflation has not been a major problem in recent decades, especially since in our global economy with imports coming from all over the world reducing the cost of products and with outsourcing reduceng the cost of services, prices should not be uncontrollably on the rise in the forseeable future so inflation is not likely to be on the list of problems to be avoided by the governors of the FED. The FED will tend to favor higher interest rates to combat inflation and lower interest rates to ccombat recession. Recession, however, is a cyclical threat that the economy faces regularly. See the chart indicating past recessions and the FED funds rate. I expect interest rates to stay low and go even lower based on FED actions.
The LIBOR does fluctuate away from the FED funds rate from time to time due to reluctance of European banks to lend to each other out of concern for losses that banks may have to write off due to sub-prime based loans going bad. But since the FED and the ECB (European Central Bank) strive to use the same interest rate medicine to nurse their respective economies, gaps between 1 month LIBOR and the FED funds rate is likely to be short term and since the loans based on LIBOR are variable the borrower will reap the benefits of lower rates more than with a fixed rate.
Based on this historical rate comparison, I would certainly not be afraid of variable interest rate loans.
