What is a key characteristic of a variable rate mortgage?

A key characteristic of a variable rate mortgage is that the interest rate changes periodically based on market conditions. This means that the mortgage rate is often linked to a specific benchmark, such as the prime rate or another interbank rate. When the benchmark rate fluctuates due to changes in the economy or monetary policy, the interest rates on these mortgages adjust accordingly, which can affect the monthly payments the borrower makes.

This flexibility allows borrowers to potentially benefit from lower rates when market conditions are favorable, but it also introduces the risk of higher payments if interest rates increase. The adaptability of the interest rate in response to market conditions is what clearly distinguishes variable rate mortgages from fixed-rate mortgages, which maintain a constant interest rate throughout the loan term.

Other options reflect characteristics that do not accurately describe variable rate mortgages, highlighting the importance of understanding the unique features of various mortgage types.