Let us assume that you have already decided that you are going for a variable rate mortgage. There are some technical term you should be aware of.
ARM - Adjustable Rate Mortgage
VRM - Variable Rate Mortgage
To be on the same boat please note that we ate talking about interest rate tied with bank prime rate and a fixed term mortgage. The rate could be at a discount or a premium. It all depends on the banks carrying cost of the mortgage. Generally we all refer to Variable Rate Mortgage when we talk about variable rate mortgage.
There is a very important difference between a VRM and ARM.
In a VRM the mortgage interest rates are offered tied with the Prime rate and either at a premium or at a discount. While the discount remains the same during the term of the mortgage, the prime may go up or down. That means that the periodic mortgage payment you make sees a change. Usually for a VRM the periodic payment is pegged at the prime (if discount is offered). Hence when prime goes up your principle payment goes down and more payment is diverted towards the interest portion. Sometime there is a cap on the interest rate in a VRM. Whereas when prime goes down more portion of your payment is used to pay down the principle.
An ARM is almost same like VRM except the fact that you pay what the actual amount is. The payments are usually recalculated after a predetermined time period. If prime goes down your payment goes down and if prime goes up then your payment goes up too.
ARM and VRM both have the potential to influence your mortgage payoff date or so called Amortization Period. So you should keep your eye on them. The cap on VRM may negatively impact your mortgage amortization period.
