A variable rate mortgage is a type of home loan that carries an interest rate that can fluctuate over the duration of your loan. The most common type of variable rate mortgage is an Adjustable Rate Mortgage (ARM); this type of loan provides an initial fixed-rate period of several years, followed by regular adjustable rates over the remainder of the loan term.

Rather than having a single, fixed interest rate throughout the loan duration, the mortgage holder instead employs a floating rate based upon an index rate. Oftentimes, the index rate employed by the mortgage holder might be the Prime Rate or the Fed funds rate, with a loan margin added to it. The loan margin is the amount above the index rate that the borrower must pay for the duration of the loan.

At any given time, if the index rate changes, so does the interest rate on the mortgage. Therefore, the mortgage holder's payments may both increase and decrease during the course of the loan. This can be both a benefit and a risk for the mortgage holder, as any decrease in the index rate should be reflected with a smaller monthly payment, but an increase would mean a higher payment.

For those willing to take on a bit of extra risk, variable rate mortgages can offer the possibility of significant savings in interest payments. On the other hand, it is important to remember that the current index rate is not within the mortgage holder's control, and it could change drastically over the course of the loan, drastically increasing the monthly payment – potentially putting the mortgage holder in a difficult financial position. Therefore, it is essential to consider the long-term financial impact of any variable rate mortgage before agreeing to the loan.