A variable-rate mortgage is also known as floating rate mortgage in which rate of interest payable changes periodically based on an index which shows the cost to the lender of borrowing on the credit markets.
- Variable-rate mortgages have lower initial interest rates than fixed-rate mortgages and hence borrower has to bear lower monthly mortgage payments.
- As the payments for variable rate mortgage are affordable, it is easy to qualify for variable rate mortgage than fixed rate mortgages.
- These mortgages are more flexible than their fixed-rate counterparts, so that borrowers can choose for terms that provide lower initial payments ranging anywhere from one month to 10 years.
- Variable-rate mortgagesis also ideal option for borrowers who don’t wish to live in a home for more than few years as well as those who don’t expect to pay off their mortgages rapidly.
- One of the biggest disadvantages of variable rate mortgage is payment shock. A borrower may have to pay higher monthly mortgage payments if there is sudden rapid increase in the interest rate.
- Variable rate mortgages are generally more complex than their fixed-rate mortgages as they are available in a variety of loans. As interest vary from time to time, it is not easy to compare the cost of mortgage being offered by different lenders.
- The changing mortgage rate makes it difficult to predict future payments and it eventually makes difficult for borrowers to make monthly budgets.
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