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What is a Variable Rate Mortgage?

Adjustable rate mortgage is also known as variable rate mortgage which is defined as a loan with an interest rate which keeps on fluctuating according to the market conditions. The interest rate is indexed and it will vary on the condition of the credit markets. The loan can be offered at a variable rate and there will be clearly visible links to the market. In most advanced countries except USA the variable rate mortgage is a common entity.

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Salient features of adjustable rate mortgages

The starting interest rate or the rate at which the loan begins is called the initial interest rate (IIR).The time period through which a certain rate remains still is called the adjustment period. The rate changes at the end of every adjustment period.

ARM rates show a pattern of change according to the index. The national/ regional average fund costing is a popular index. Mortgage brokers or lenders can add some points to the index rate and this is known as the margin. The IRC or the interest rate caps signify the max limit to the changes that can occur to the interest rates.

Often a mortgage broker offers ID (Initial discounts) as promotional aids in the starting year of the loan term. This means that the borrower will have to pay below the existing rate.

If the index rate is applied on a movement basis then the loan rate will sway at a pre fixed ratio to the index movement. The adjustment is fixed here and the index rate is variable.

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