Variable Rate Mortgage

• When a mortgage has a variable rate, this means that the rate of interest charged on the loan is subject to change, and the lender chooses when to raise or lower interest rates. Because mortgage loan business is competitive, lenders typically raise or lower interest rates in line with the movement of interest rates corresponding to an index. For example, in the USA, the interest rate offered by One-Year Constant-Maturity Treasury securities provides a rate for lenders setting interest rates for variable rate mortgages. Lenders usually charge a margin above this rate to variable mortgage borrowers. You should check which index a lender is basing a variable rate mortgage on, and what the margin the lender charges. With a variable rate mortgage, the borrow assumes the risk of generally rising interest rates, as the lender can increase rates to match the market. The reverse is also true, in that borrowers benefit from falling interest rates when lenders lower their rates to remain competitive when market rates are falling. In the U.S., variable rate mortgages are often known as adjustable rate mortgages (ARM).
  
  

Amortization Term

• Amortization refers to the process of paying off the capital amount of a debt, such as a mortgage loan, over a fixed period of time. The length of time from when the loan is issued to the time when the borrower has paid back the capital value of the loan in full, is known as the amortization term. In the American mortgage market, standard amortization terms have typically been 15 years and 30 years. Although many mortgage lenders offer other fixed terms, such as 20 or 25 year terms, the standard 15 year or 30 year terms are still available from most mortgage lenders. Typically, regular mortgage repayments contain an interest component, the amount the lender charges for granting the loan, and a capital repayment component. The capital repayment portion reduces the mortgage debt over time until the debt is cleared at the end of the amortization period.
  
  

Repayment Terms

• Standard mortgage repayments are typically monthly repayments. Borrowers pay an amount of interest and capital each month, until the mortgage debt is paid off in full. Each month the capital amount of the debt reduces as the borrower pays back a portion of the capital. Some lenders offer non-standard repayment terms, such as bi-weekly repayments. If you make bi-weekly repayments, this usually reduces the amount of interest you pay over the lifetime of the mortgage, because the capital you owe reduces every two weeks, and the interest due on the capital you owe also reduces. This means that the interest component of each payment becomes less every two weeks, assuming interest rates do not rise or fall.
  
  

Variable Rate Mortgage Advantage

• Variable rate mortgages are usually offered at a lower rate than fixed rate mortgages. This is because they represent less of a risk to the lender than a fixed rate mortgage. For example, if you take out a fixed rate mortgage for a term of 30 years, and the interest is fixed at 5 percent, you only pay that rate of interest for the whole 30 year term. If interest rates rise in the meantime, the lender cannot charge you a higher rate of interest, so the lender loses out. However, if interest rates do rise during the term of your mortgage, you may lose the advantage you had when you took out the mortgage because of the extra interest you have to pay when interest rates rise and your lender increases the amount of your repayments.