What Does Variable Rate Mortgage Mean?
A variable rate mortgage is a home loan with an interest rate that changes over time, causing the monthly loan payments to go up or down. This is in comparison to fixed rate mortgages, where the monthly payments will always stay the same.
The interest rate on a variable rate mortgage is connected to market interest rates because this reflects how much it costs the lender to borrow money. When market rates go up, payments on the variable rate mortage go up. When market rates go down, payments on the variable rate mortgage go down.
Insuranceopedia Explains Variable Rate Mortgage
Variable rate mortgages are riskier than fixed rate mortgages because the payments are less predictable. However, the monthly payments on a variable rate mortgage start out lower. It's a tradeoff between locking in a payment versus starting at a lower cost.
There are limits to how much a variable rate mortgage can change. Most loans set a maximum amount they can change in one year while also setting a cap where payments will stop going up. Also, the frequency at which payments may change also depends on the terms of the loan. Some loans adjust monthly while others adjust only once a year.
People who take out a variable rate mortgage need to save more so they are prepared for higher payments in the future. They may also want to consider more life insurance so they would leave their heirs in better shape to manage the payments.