Adjustable Rate Mortgage - Definition and Overview

An adjustable rate mortgage or variable rate mortgage is a loan secured on a mortgage whose interest rate and so monthly repayment vary over time. Other forms of mortgage loan include interest only mortgage, fixed rate mortgage, discounted rate mortgage and balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise

Variable rate mortgages are the most common form of loan for house purchase in the United Kingdom but are unpopular in some other countries. Variable rate mortgages are very common in Australia and New Zealand. An adjustable rate mortgages may offer the ability to repay principal (or capital) early without penalty, leading to significant reductions in the total cost of the loan, and also potentially shortening the original term of the loan.

Adjustable rate mortgages are sometimes sold to unsophisticated consumers who are unlikely to be able to repay the loan should interest rates rise, which they often do. In the United States, extreme cases are characterized by the Consumer Federation of America as predatory loans.

Due to changes in government policy among many OECD countries, the Federal Reserve Bank (or its equivalent) is now charged with maintaining an inflation rate at a low (at or below 2 percent) level. This policy has made a significant impact on the volatility of adjustable rate mortgages, as the supply of money is more tightly controlled by the Federal Reserve, reducing the frequency and size of fluctuations in the base rate.

External links

• Consumer Handbook on Adjustable Rate Mortgages (http://www.federalreserve.gov/pubs/brochures/arms/arms.pdf)
• Historical Mortgage Rates, 1977 - present (http://www.hsh.com/idxhst.html)
• Mortgage, Loan and Refinance Information: A Borrower's Guide to Online Resources. (http://www.noendpress.com/pvachier/mortgage/)