Variable vs Adjustable Rate Mortgage
Did you know there are two types of mortgages whose interest rate can change as per the change in the lending institutions prime rate? That’s right, the two types are the Variable Rate Mortgage and the Adjustable Rate Mortgage.
You now might be asking what is the difference between a variable vs adjustable rate mortgage. In this post we provide a general overview of each one and hopefully provide a clear explanation to your question what is the difference between a variable vs adjustable rate mortgage.
Adjustable Rate Mortgage – ARM
Payments automatically adjust with changes in the prime rate of the lending institution your mortgage is with to ensure that you maintain the original amortization schedule of your mortgage. The rate varies during the term of the adjustable rate mortgage.
The interest rate can change from time to time because it changes when the prime rate changes.
If your adjustable rate mortgage interest rate decreases, the payment amount also decreases..
If your interest rate rises, the mortgage payment amount will also increase.
One advantage of this product is you can have the ability to potentially lower, short-term interest rates.
Variable Rate Mortgage – VRM
The main difference with a variable vs adjustable rate mortgage is that the mortgage payments with the variable product remains fixed for the duration of the term; as the interest rate changes with any fluctuations in the prime rate. If the prime rate decreases, more of the mortgage payment will go towards paying off the principal; if the prime rate increases, more of the mortgage payment will go towards interest costs.
Your amortization period (number of years to repay the mortgage) may vary and be longer if rates have risen or be shorter if rates have fallen since the start of the term.
With both the Variable Rate Mortgage and the Adjustable Rate Mortgage you can always convert your mortgage into a fixed rate mortgage should you feel that the prime rate is rising or don’t have the tolerance anymore of rate fluctuations. Most of the time, the variable and adjustable interest rates are lower than the fixed rates.
If you still are not sure of which one is better or what the main differences are between a variable vs adjustable rate mortgage we encourage you to contact us with your questions and we would be happy to answer them. You may also like to add your remarks and questions in the comment section below.