Variable Rate Mortgage
What Does Variable Rate Mortgage Mean?
A variable-rate mortgage is a home loan with an interest rate that fluctuates over time, causing monthly payments to increase or decrease. This contrasts with fixed-rate mortgages, where monthly payments remain constant throughout the loan term.
The interest rate on a variable-rate mortgage is tied to market interest rates, reflecting the cost for the lender to borrow funds. When market interest rates rise, the payments on a variable-rate mortgage increase. Conversely, when market interest rates fall, the payments decrease.
Insuranceopedia Explains Variable Rate Mortgage
Variable-rate mortgages are riskier than fixed-rate mortgages because the payments are less predictable. However, they typically start with lower monthly payments, offering a tradeoff between locking in a consistent payment and beginning with a reduced cost.
Most variable-rate mortgages have limits on how much the interest rate can change. These include a maximum annual adjustment and a cap on how high the payments can go overall. The frequency of payment adjustments also varies by loan terms, with some adjusting monthly and others only annually.
Borrowers with a variable rate mortgage should save more to prepare for potential increases in payments. Additionally, they might consider obtaining more life insurance to ensure their heirs are better positioned to manage the payments in the event of their passing.
