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. 
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:
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It 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.
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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 :
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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.
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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.
For Example, if the borrower makes a minimum payment of $1,000 and the ARM has accrued monthly interest in arrears of $1,500, $500 will be added to the borrower’s loan balance.
Option ARMs are best suited to sophisticated borrowers with growing incomes, particularly if their incomes fluctuate seasonally and they need the payment flexibility that such an ARM may provide. Sophisticated borrowers will carefully manage the level of negative amortization that they allow to accrue.
Minimum Payment Option :
This is a fancy term for a loan that allows a borrower to choose their monthly payment from several options. Minimum Payment Option or Cash flow ARM mortgages are synonymous with option ARM or payment option ARM mortgages, however it should be noted that not all loans with cash flow options are adjustable.
Limitation on Charges Or Loan CAPS :
Loan caps provide payment protection against payment shock, and allow a measure of interest rate certainty to those who gamble with initial fixed rates on ARM loans. There are three types of Caps on a typical.
Initial Adjustment Rate Cap: The majority of loans have a higher cap for initial adjustments that’s indexed to the initial fixed period. In other words, the longer the initial fixed term, the more the bank would like to potentially adjust your loan. Typically, this cap is 2-3% above the Start Rate on a loan with an initial fixed rate term of 3 years or lower and 5-6% above the Start Rate on a loan with an initial fixed rate term of 5 years or greater.
Rate Adjustment Cap: This is the maximum amount by which an Adjustable Rate Mortgage may increase on each successive adjustment. Similar to the initial cap, this cap is usually 1% above the Start Rate for loans with an initial fixed term of 3 years or greater and usually 2% above the Start Rate for loans that have an initial fixed term of 5 years or greater.
Lifetime Cap: Most First Mortgage loans have a 5% or 6% Life Cap above the Start Rate (this ultimately varies by the lender and credit grade).
Applicability Of ARMs ( Adjustable Rate Mortgage) :
This Type is commonly used in many countries like IRELAND, CANADA. also in New Zealand and Australia.In some countries, true fixed-rate mortgages are not available except for shorter-term loans; in Canada, the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years.
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