Variable Mortgage Rates vs. Adjustable Mortgage Rates

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

When it comes to mortgages, you really have to understand what you are getting so you won't get hit with a surprise in your monthly mortgage bill. We'll learn the difference between a variable rate mortgage and an adjustable rate mortgage.

Choosing a Mortgage

When people purchase a home, they will usually need a mortgage to pay for it. The mortgage is a loan from the bank. There are several kinds of mortgages that people can choose from. They can select a fixed rate mortgage, where the interest rate remains the same for the whole of the mortgage term. Or they can choose an adjustable or variable rate mortgage, where the interest rate can change during the term of the mortgage. In this lesson, you'll learn about the differences between an adjustable rate and a variable rate mortgage.

First, let's meet Sarah. She is a single mom with two little kids. She wants to buy a little three-bedroom house in the suburbs close to her kids' school and only fifteen minutes away from where she works. Sarah is on a tight budget, so, because interest rates are high right now, she's looking at getting either a variable rate mortgage or an adjustable rate mortgage. Let's see her thoughts as she looks over the two different types of mortgage.

Sarah wants to buy a house in the suburbs
variable and adjustable mortgage

Variable Rate Mortgage

Sarah first looks at the variable rate mortgage. A variable rate mortgage is one where the interest rates change with the market but the monthly payments are always the same. Sarah likes it because her monthly payments will be predictable, and she won't have to worry that if the interest rates increase, her payments will suddenly increase. This is something that she needs since she's on a fixed income and can only pay so much per month towards her mortgage.

Adjustable Rate Mortgage

Next, she looks at the adjustable rate mortgage. An adjustable rate mortgage is one where the monthly payments can change when the interest rate changes. So, if the interest rates go lower, then the monthly mortgage payments will be lower too. But if the interest rates go higher, then the monthly mortgage payments will go higher too.

Sarah thinks this over, and while she likes the idea that her monthly payment could go lower, she doesn't like the idea that it could also move in the opposite direction and increase.

Interest Rates

Sarah knows that her interest rate is high right now, so there is a great possibility that interest rates will go down. She's looked at interest rates over the past few decades and right now, they are at nearly the highest point they've ever reached. She's pretty confident that if anything, the interest rates will go down.

Variable and adjustable rate mortgages are more appealing when interest rates are high, because it is likely that they will get lower over time. When interest rates are low, fixed rate mortgages are more popular because people don't want to worry that their low interest rates may increase.

Dangers

Because there is never any guarantee that interest rates will fall, there is a danger built into these mortgage types. Interest rates could just as well increase, and you would then have a mortgage with a high interest rate.

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