Variable Rate Mortgage

Variable rate mortgage, introduced in the late 70's is a mortgage loan with an interest rate that adjusts up or down during the life of the loan to reflect rising or falling cost to the lender. The Federal Home Loan Bank Board (FHLBB) limited adjustments to no more than 1/2 of 1% per year and a total upward adjustment of no more than 2 1/2 % during the life of the loan. Rate adjustments are based on an index of borrowing costs for savings and loan associations published by the FHLBB. The rules specify that if the index falls, the lender must reduce the interest rate. If the index rises, the lender may increase the rate. Additionally, the lender was required to offer the prospective borrower the choice of a fixed-rate loan or a variable rate loan and to disclose to the borrower what would happen to the monthly payments if interest rates increased. Despite these safeguards and the fact that  a variable rate loans usually carry lower initial interest rates than fixed-rate loans, there was skepticism from the public. After all, long-term fixed-rate loans had been the standard method of real estate lending for more than a generation.

Variable Rate Mortgage to Home Financing