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  • Adjustable-Rate

  • An adjustable rate mortgage is one in which the interest rate fluctuates with the prime lending rate of the lender during the length of the term. The term of a mortgage is usually 5 years but it can vary anywhere from 6 months to 10 years. The term of a mortgage should not be confused with the amortization. The term represents the length of the contract between the borrower and seller. The term is usually much less than the amortization period. The amortization is the length of time that it would take to pay off the mortgage completely under the current terms. The standard amortization length is 25 year but again it can vary usually anywhere from 15 to 35 years.

    Therefore, an adjustable rate is a bit of a gamble. It can start higher than the fixed rate (if the prime rate is anticipated to decrease) or it can start lower than the fixed rate (if the prime rate is anticipated to increase).

    Currently the variable rate is less than the fixed because rates are anticipated to increase. If rates do continue to increase (as they are expected to do), then the borrower with the variable rate wins only IF their rate increases slowly and does not surpass the fixed rate early in the term (or at all). 

    Borrowers with fixed rates should beware of a false sense of security. They are only safe until the mortgage matures (ex. in 5 years). They then become exposed to current market rates just like everyone else!