The Definition of a Variable-Rate Mortgage
by Dennis Hartman
Variable rate mortgages can cost, or save, a great deal of money.
Despite their similarity, the terms variable-rate mortgage and adjustable-rate mortgage don't necessarily have the same meaning. Variable-rate mortgage is a more general term in use throughout the world. In the United States, the term adjustable-rate mortgage is much more common. The Federal Reserve Board defines an adjustable-rate mortgage as any mortgage with an interest rate that changes. While this is the same qualification for naming a variable-rate mortgage, economists who refer to an adjustable-rate mortgage, or ARM, are usually implying an American mortgage that falls under the oversight of the U.S. government.
Most variable-rate mortgages start out with a relatively low interest rate. This makes them attractive to home buyers and keeps the monthly mortgage payment low. When borrowers sign a mortgage agreement for a variable-rate mortgage, they agree to an initial rate period, which
defines how long the initial rate will last. This may be anywhere from one month to several years depending on the terms of the loan. Once this period passes, the lender may change the interest rate, resulting in a higher, or lower, monthly bill for the borrower.
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