What Variable Rate Mortgages Are

When it comes to mortgages, there are two major decisions you need to make about the type of mortgage you want to get

. The first one is how long you want your repayment term to be, with 15 years and 30 years as the two most popular options. The second one is whether you want a fixed interest rate or a variable interest rate. We want to help you understand this distinction and learn what a variable rate mortgage is.

Variable Interest Rate

In the most basic sense, a variable interest rate is one that changes over the life of the loan. This means that although your interest rate starts out as a specific percent, it is actually subject to change on a regular basis. Therefore, you wont know for sure what interest rate you will be paying several years down the road. Each time the rate adjusts, your payment amount can change.

Readjustment Schedule

Variable rate mortgages have a set schedule at which the rate adjusts, and you can find out the schedule before you get the loan. Most of the time, the mortgage will keep a fixed rate for several years, often for the first 3, 5, or 7 years of the mortgage. Then the rate will typically adjust every year after that. In general, mortgages tell you how long the initial rate lasts, has a slash, and tells you how often the rate adjusts after the initial period. Therefore, a 5/1 variable rate mortgage has the starting rate for the first five years, and an adjustment every year thereafter.

Interest Rate Caps and Floors

Because interest rates can change so much, there are caps and floors to keep your rate within a specific range. The lender will tell you the maximum amount your rate can increase each year and the maximum overall interest rate it can get up to. When budgeting, it doesnt hurt to plan for the worst and calculate whether you could afford the mortgage if it reached its maximum rate. This is a disadvantage of fixed rate mortgages.

For more information, go to Mortgages at http://www.creditnowusa.com/Mortgages

by: Money Lender

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