Heightened phenotypic variation among mutant animals is a well-known, but poorly understood phenomenon. One hypothetical mechanism accounting for mutant phenotypic variation is progenitor cells variably choosing between two alternative fates during development. Zebrafish mef2cab1086 mutants develop tremendously variable ectopic bone in their hyoid craniofacial skeleton. Here, we report evidence that a key component of this phenotype is variable fate switching from ligament to bone. We discover that a 'track' of tissue prone to become bone cells is a previously undescribed ligament. Fate-switch variability is heritable, and comparing mutant strains selectively bred to high and low penetrance revealed differential mef2ca mutant transcript expression between high and low penetrance strains. Consistent with this, experimental manipulation of mef2ca mutant transcripts modifies the penetrance of the fate switch. Furthermore, we discovered a transposable element that resides immediately upstream of the mef2ca locus and is differentially DNA methylated in the two strains, correlating with differential mef2ca expression. We propose that variable transposon epigenetic silencing underlies the variable mef2ca mutant bone phenotype, and could be a widespread mechanism of phenotypic variability in animals.