DEFINITION of '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.

BREAKING DOWN '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.

RELATED TERMS
  1. ARM Index

    The benchmark interest rate to which an adjustable rate mortgage ...
  2. Level Payment Mortgage

    A type of mortgage that requires the same dollar payment each ...
  3. No-Cost Mortgage

    A mortgage refinancing situation in which the lender pays the ...
  4. Fixed-Rate Mortgage

    A mortgage that has a fixed interest rate for the entire term ...
  5. Rollover Mortgage

    A mortgage in which the unpaid balance (outstanding principal) ...
  6. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
Related Articles
  1. Personal Finance

    Home Mortgage

    A home mortgage is a loan given by a bank, mortgage company or other financial institution for the purchase of a primary or investment residence.
  2. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  4. Financial Advisor

    Effect of Fed Fund Rate Hikes on the Housing Market

    Understand what drives the federal funds rate and why the Fed would increase that rate. Learn about the effect of a rate increase on the housing market.
  5. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  6. Personal Finance

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  7. Personal Finance

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  8. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
Trading Center