A variable rate mortgage is a loan in which the interest rate may fluctuate from month to month, based on global and local economic conditions. In contrast to a fixed rate mortgage, the interest rate remains constant for the entire amortization period.
The advantage of a variable rate mortgage is that these loans offer rates that are typically much lower than fixed mortgage rates, for the initial period of a few years. This difference can yield significant savings for the borrower over the course of his or her mortgage term. However, at the end of this introductory period, the interest rates will change and will fluctuate with market conditions.
The main disadvantage of a variable rate mortgage is that borrowers can never know with certainty what their total mortgage charges will be from month to month. In the worst case scenario, interest rates could spike up significantly and render the mortgage payments unaffordable, forcing the homeowner to sell the home or foreclose.
Related: What is a fixed rate mortgage?