Finance

Published on September 22nd, 2014 | by EHF999

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Variable rate mortgage information

What You Should Know About Variable Rate Mortgages

Normally there are two types of home loans a borrower can opt for in UK, a fixed rate mortgage or a variable rate mortgage. A variable rate mortgage is a type of home loan where one doesn’t have to pay a fixed interest rate.

With variable rate mortgages, the interest rate is periodically adjusted based on a certain index which reflects the cost to the lender as well the cost of borrowing on the credit markets. In some cases the lender may be given the loan at his standard variable rate. Where there is no legal and direct link to a given index or market rate and the lender doesn’t offer one, the lenders can change the interest rate at his own discretion.
With fixed rate loans, borrowers usually know what the principal payments on their mortgage will be including the interest they will carry on a monthly basis as long as they are servicing the mortgage. Monthly interest and principal payments on a variable mortgage loan however depends on a predetermined schedule. This implies that with interest rates being adjusted periodically, the borrower is not confined to specific payment limits throughout the life of the loan.

Variable rate mortgages are usually attractive compared to fixed rate home loans because they have low interest rates during the initial period. The initial rate is usually less than the rate on a fixed rate mortgage and therefore a borrower can yield significant savings at the beginning of the mortgage term. Depending on the market interest rates, the rate will however fluctuate up or down once the introductory period comes to an end. In most cases, borrowers of – variable rate mortgages face challenges when interest rates increase. This is because the rates may be adjusted upwards to the extent that a homeowner defaults and he eventually loses the home to foreclosure. Generally, with a variable rate mortgage the more money one borrows the more a change in interest rates will affect his monthly payments.
Variable rate mortgages generally permit borrowers to lower initial payments as long as they are willing to assume risks that come with changes in interest rates. Besides, borrowers in UK tend to prefer contracts that have low initial rates especially on mortgages that offer low monthly payments. The decisions that borrowers make however depends on the financial advise they get from lenders especially those that prefer such loans mostly due to the market structures.
For borrowers, variable rate mortgages may be less expensive but they come with higher risks that is borne by the borrower himself. Most of these loans have teaser periods or short initial fixed rate periods when the loan yields relative low rates below a given index. The initial fixed rate period can be between a month to a year after which the interest rates either decrease or increase. In most cases, the teaser period may influence a borrower to think that a variable rate mortgage is more beneficial that it actually is. Where the teaser period rates are low, the borrower is likely to pay higher interest rates.


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