Variable rate mortgages, also known as adjustable rate mortgages (ARMs), are home loans in which the interest rate is not fixed for the entire loan term. Unlike fixed rate mortgages, where the interest rate remains constant for the duration of the loan, variable rate mortgages have an interest rate that fluctuates periodically based on changes in a specified financial index.
These mortgages typically have an initial fixed rate period, typically ranging from one to ten years, during which the interest rate remains constant and low. Following this fixed rate period, the interest rate is adjusted periodically, often once a year, based on changes in a predetermined index, such as the prime rate or the London Interbank Offered Rate (LIBOR).
The key characteristic of variable rate mortgages is that their interest rates can rise or fall over time, reflecting changes in the market and the index to which they are tied. This means that borrowers with variable rate mortgages may experience fluctuations in their monthly mortgage payments, as the interest rate adjusts up or down.
Variable rate mortgages provide borrowers with the potential for lower initial interest rates compared to fixed rate mortgages, making them attractive to buyers who want to take advantage of lower mortgage costs initially. However, they also entail a higher level of risk since the interest rate can increase significantly over time, potentially leading to higher monthly payments.
It is important for borrowers to carefully consider their financial situation, risk tolerance, and long-term plans before opting for a variable rate mortgage.
