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Variable-Rate Mortgage
Definition
A variable-rate mortgage has an interest rate that can change periodically based on market conditions, causing monthly payments to fluctuate.
Explanation
Variable-rate mortgages often start with lower rates than fixed-rate loans. Rate adjustments happen at specified intervals tied to a benchmark index. Caps limit how much the rate can increase each adjustment period and over the loan's lifetime.
These loans carry interest rate risk — if rates rise, payments can increase significantly. Best suited for borrowers who plan to sell or refinance before the rate adjusts.
Example
A 5/1 ARM starts at 5% for 5 years on a $300,000 loan ($1,610/month). After adjustment to 7%, the payment rises to $1,995/month.