How Does A Variable Rate Mortgage Work ?
If you are searching for the new house, then you have already planned how to pay for the new house. No doubt you will be approaching a bank for a home mortgage. There are different types of mortgages that people can get, and one of them is the variable rate mortgage.
Here are some basics to get you out of the wondering about what is this mortgage.
The mortgage loan is nothing but the loan which is issued against the property. Basically, the property is used as collateral. So, if you default on the mortgage payments, the bank has the right to foreclose the property and auction it in order to recover the money that was lent to you.
The sum of the total money that you borrow is called as principle. Every mortgage will fix some rate of interest depending upon the principle amount and also how long you will take to pay back the principle amount. However, there is another type of mortgage known as the variable rate mortgage or adjustable rate mortgage where the rate of interest keeps changing depending on several factors.
Some of the factors by which the rate of interest is affected include market indices, the amount of down payment made and the margin of the lender.
The first factor is index. This index is like a guide for the lender by which he can calculate the change in the rate of interest. As the index fluctuations occur in the market, the rate of interest will also fluctuate. The margin is the representation of the cost of performing the business and profit the lender gets on the loan. This rate will not change. By combining both index and margin, the lender can get the total rate of interest for that mortgage. This rate of interest cannot be changed randomly; it can be changed only in specified time periods called as adjustment periods. These adjustment periods will differ in length; they may be annual or for a few years. Another term which will affect the rate of interest is down payment which is nothing but the money you invest up front in the house. Larger the down payment, lower the rate of interest.
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