Variable Interest Rate

Definition

A Variable Interest Rate is an interest rate on a loan or mortgage that fluctuates depending on the overall prime rate interest rate that changes periodically. If the overall prime rate interest rate declines then the variable rate on the mortgage or loan also declines. However, if the prime rate increases then so does the loan. This means that the payment will stay the same but the amount paid on the principal of the loan will vary depending on the interest rate.

The type of financial products that can come with variable interest rates include:

  • Credit cards
  • Adjustable-rate mortgages
  • Private student loans
  • Auto loans

The difference between a Fixed vs Variable mortgage is that the interest on the fixed mortgage does not change over the mortgage term. The interest rate could potentially be higher but the amount of principal being paid on the mortgage remains stable. A variable mortgage is where the interest rate can fluctuate causing the amount of the principal being paid to also fluctuate both up and down. If the interest rate lowers then so do your payments, and the amount of the principal that is being paid is raised.

Variable Interest Rate kept simple

Variable interest rates for loans and mortgages are based on the prime rate interest rates. A variable mortgage rate will allow a buyer to buy a house at a possible lower interest rate with the hope that the interest will continue to stay low or even decline. However, the risk with a variable mortgage is that the loan can increase should the prime rate also increase which also runs the risk of the buyer paying more for a mortgage than expected.

How does Variable Interest Rate apply to you

If you purchase a home for $300,00 with a variable mortgage interest rate of 3.2% the payment would be $1300 per month. However, if the prime rate increases it’s possible the interest rate on your mortgage will increase as well. If it goes as high at 4.00% interest this means less money goes towards the principal amount of the loan and your payments rise to $1600 per month.

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