With a variable-rate mortgage, the interest rate fluctuates based on the bank’s current prime rate. Some people chose a variable-rate mortgage because interest rates are low and they do not expect those rates to rise during the mortgage term. Like a fixed-rate mortgage, your monthly mortgage payments are the same, but the amount that goes toward the principle and interest will change depending on what the prime rate is.
If interest rates fall, more of your mortgage payments goes toward the total principle and less goes toward interest. But if rates rise, less of your payment goes to paying off the mortgage and more goes into the banks.
Because of the higher risk associated with a variable-rate mortgage, the rates associated with this type of mortgage are generally lower than they would be with a fixed-rate mortgage.
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