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Variable Rate Mortgage

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Variable rate mortgage is a relatively new type of Mortgage phenomenon. it is a Mortgage in which payment is made to the lender on variable  Interest rates. For this purpose, different bases are used to calculate interest rate. such as their Cost of Funds indices or Rate provided by London interbank offered rate. mortgage

This type of Mortgage is different from others like Fixed Rate Mortgage, Interest Free Mortgage or Balloon payment mortgage. This Mortgage phenomenon is helpful for both Lender and Borrower, if during loan period interest rate in market rises, it will be profitable for Lender and if interest rate falls, it is beneficial for borrower and vice versa. So it will reduce the possibility of suffering the loss by only Lender or Borrower.

Some important Features of Adjustable or Variable Rate Mortgage are:

  • mort_exp_vrIt has the Adjustment periods facility.  it  means the Period in which payments will be made. The rate of interest is recalculated at the end of this period. and payment schedule is re-adjusted.

  • There is A MARGIN that lenders add to the index rate to determine the ARM’s interest rate.

  • There are Discounts and concessions available. this will reduce the initial payment at below market rate.

There are certain reasons why to choose Adjustable Rate Mortgage :

  • ARMs (Adjustable Rate Mortgage)  generally permit borrowers to lower their initial payments if they are willing to assume the risk of interest rate changes. In many countries, banks or similar financial institutions are the primary originators of mortgages.
  • There is also a term “Option ARM”  which is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.

These types of loans are also called “pick-a-payment” or “pay-option” ARMs.

When a Borrower opt this type of loan payment scheme. He pays his minimum  accrued amount under “Option ARM”. he gets temporary relief but his remaining payable amount will be added in his total loan amount which he has to pay at the end of total period of loan. it is similar to BALLOON Payment Mortgage.

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September 2011
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