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Variable vs Adjustable Rate Mortgage

variable vs adjustable rate mortgage

Is there a difference between Variable vs Adjustable rate mortgage?

When speaking with friends and family about mortgages?  Have the words variable and adjustable come up? Are they exactly one and the same? If a variable rate mortgage is the same as an adjustable rate mortgage why are there different names for them? There must be a difference between the two right? Yes there is a slight difference.

VRM = variable rate mortgage and ARM = adjustable rate mortgage

Variable vs Adjustable

The main difference is that with the variable mortgage your mortgage payment amount always remains the same. It does not go up and down with changes in the prime lending rate. With an adjustable rate mortgage the amount of your payment will go up and down based on the changes of the prime lending rate.

As the writing of this post the prime rate is 5.95%. Both products will either give you a discount off of the prime rate or add a premium to the prime rate. For example Prime -.50% vs Prime +.50% respectively. 

For example

Let’s use a case scenario to show the difference of a variable vs adjustable rate mortgage

House purchase price is $700,000

Down payment is $140,000 (20%)

Mortgage amount being borrowed is $560,000

Amortization 25 years

VRM is Prime +.50% = 5.95 + .50 = 6.45%

Monthly payment $3,734.06

If the prime rate goes up later on, you will still be paying $3,734.06 each month, but more of the payment will go towards paying the interest portion of the loan and less will go to paying down the principal amount. Vice versa, if the prime rate goes down your monthly payment will stay the same, but this time instead of making more payments towards interest you will make more payments towards paying down your principal balance.

With the above scenario we now look at an ARM set up. If the prime rate goes up, for example, by .50% that means that your new rate will be 6.45 (5.95 +.50) + .50 = 6.95%.  Your monthly payments will go up to $3,905.06, but your payment distribution towards interest and principal will remain about the same.

Pros and Cons of adjusting your monthly payment

For some consumers they will want to keep their monthly payment amounts the same to give them a peace of mind for budgeting purposes, but others would be fine with their payments going up and down. Thus far, working with different financial institutions it seems to be that the chartered banks offer variable rate mortgages (VRM) vs monoline lenders who offer adjustable rate mortgages (ARM). Monoline lenders are those companies who for the most part are not chartered banks. They are mortgage companies / lenders that work directly with the mortgage broker community and do not offer all the different financial products that banks do, but they compete with the banks for mortgage business by offering competitive mortgage rates.

Trusterra Mortgage is a mortgage brokerage company that works with clients to help them achieve their real estate financing goals. We are not attached to any particular brand or lender and do not try to upsell other products. Mortgages are the only thing we do day-in and day-out. Contact us with any questions you have. Let’s work together on your next real estate transaction and its mortgage financing requirements.

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