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Variable Rate Mortgage

Definition

A variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market or index the rate can be changed at the lender's discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government, with caps on charges. In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

Home Ownership by Country


What is 'Variable Rate Mortgage'

A type of home loan in which the interest rate is not fixed. The two most common types of mortgages in the United States are fixed rate and variable rate (also called adjustable rate). With a fixed rate mortgage, the interest rate does not change for the entire loan term.


Borrowers know with certainty what the interest and principal payment on their mortgage will be each month for as long as they carry the mortgage. With a variable rate mortgage, the interest rate adjusts periodically. Monthly principal and interest payments change according to a predetermined schedule throughout the life of the loan.

Explaining 'Variable Rate Mortgage'

Variable rate mortgages are attractive because they usually have a low interest rate for an initial period of a few years, and that initial rate is usually less than the rate on a fixed rate mortgage. This interest-rate difference can yield significant savings for borrowers at the beginning of the mortgage term. However, once the introductory period ends, the rate will move up or down as market interest rates change. Interest rate increases can be problematic for borrowers with variable rate mortgages. In a worst-case scenario, the mortgage payments can become so unaffordable that the homeowner defaults and eventually loses the home to foreclosure. In general, the more money the homeowner has borrowed, the more a change in interest rate will affect the monthly payment amount.


Further Reading


An analysis of variable rate loan contractsAn analysis of variable rate loan contracts
www.jstor.org [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Housing finance and monetary policyHousing finance and monetary policy
academic.oup.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Choosing between fixed and adjustable rate mortgages: NoteChoosing between fixed and adjustable rate mortgages: Note
www.jstor.org [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Fixed‐and Variable‐Rate Mortgages, Business Cycles, and Monetary PolicyFixed‐and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy
onlinelibrary.wiley.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

The process of financial innovationThe process of financial innovation
www.jstor.org [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Modeling surrender and lapse rates with economic variablesModeling surrender and lapse rates with economic variables
www.tandfonline.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Variable rate mortgages: confusion of means and endsVariable rate mortgages: confusion of means and ends
www.tandfonline.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Markets and housing financeMarkets and housing finance
www.sciencedirect.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

Some economic implications of the indexing of financial assets with special reference to mortgagesSome economic implications of the indexing of financial assets with special reference to mortgages
link.springer.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …

The interaction between mortgage financing and housing prices in GreeceThe interaction between mortgage financing and housing prices in Greece
link.springer.com [PDF]
… desirable properties that they are independent of the stochastic properties of the state variables and, under reasonable conditions, are linear in the spot rate … complex and the simpler formulas actually used to determine interest payments on risky variable rate loans are …



Q&A About Variable Rate Mortgage


Are there any other risks associated with these loans besides rising interest rates or borrowing too much money?

Yes, if you sell your house before paying off your loan balance and then buy another house using another new loan at today's higher prices, you may find yourself "upside down" on both loans when combined with closing costs from selling one house and buying another. You may also face problems if home prices fall during your repayment period because you'll owe more than your home is worth when it comes time to sell or refinance again."

What does it mean to have a variable rate mortgage?

The interest rates do not change for the entire loan term.

What are two types of mortgages?

Fixed and variable.

Is there anything else that can make monthly payments unaffordable on these loans?

Yes, if you borrow too much money your payment could become unaffordable even if interest rates don't rise significantly.

Why would you choose a variable rate mortgage over a fixed one?

Variable Rate Mortgages usually have lower initial rates than fixed ones, but once that introductory period ends, the interest rates will adjust as market interest rates change.

What is a variable rate mortgage?

A type of home loan in which the interest rate is not fixed.

How can this be problematic for borrowers with variable-rate mortgages?

In general, the more money borrowed, the more an increase in interest will affect monthly payments.