What Is Variable Rate Mortgages ?
Variable rate mortgage is also called as adjustable or floating rate mortgage. It is a loan whose interest rate will change, and if the interest rate changes, the monthly payment will also change to reflect new interest rate.
As the home cost is increasing, more and more people are opting for variable rate mortgages. When compared to the fixed rate mortgages, the starting interest rates for this type of mortgage are low. As payments are affordable, the qualification for variable rate loan is easier when compare to fixed rate loan. This particular situation allows many homebuyer to opt for homes that are a little more expensive than what they would have opted for if they were going for fixed rate mortgage.
n variable rate mortgages, the period of time is set in which the rate of interest will be in effective. This period is commonly called as introductory or teaser rate. Different variable mortgages have different time periods. Depending on the prevailing rates present in the market, the interest rate will change once the introductory period is over.
The flexibility lies in variable rate mortgage based on initial payment for a period which can range from one year to ten years. Depending upon the flexibility, the buyers will get some offers like bonus payments and so on.
The risk for the homebuyer is the repayment shock, which comes when the interest rate will increase. This interest rate will increase rapidly which will, in turn, increase the monthly payments. When this happens, homebuyers may find it difficult to meet the monthly obligation.
Another major disadvantage for variable rate mortgages is they are more complex than their fixed rate counterparts. It is a challenge to choose the correct type of loan since there are many available with varying terms and conditions.
Few loans will give a time period in which borrower can pay just the interest for the loan. If the interest rate is raised, the amount for the monthly payment can be increased by 100 percent or higher. In these loans, some complex terms are also present like penalties for prepayment of the loan and high fees if the borrower wants to opt for refinancing.
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