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.