What is a variable rate feature on a mortgage loan?
A variable rate feature means that the interest rate on the loan will not be “fixed” and will not necessarily remain constant. A variable rate loan is tied to an index of some sort. This may be the bank’s prime rate, the prime rate as quoted by the Wall Street Journal or LIBOR (an international index). If your rate is variable and is prime + 3%, if the prime is 6%, your rate is 9%. If the prime goes up or down, so does your loan rate. The loan rate may fluctuate with the index it is tied to daily, or it may be adjusted say on the first day or every calendar quarter. The question to be asked are do you believe the index will remain constant or decline until after you repay the debt, convert it to a fixed rate or sell the property? This is how a borrower takes advantage of variable rates.
