Definition of "Variable Rate Mortgages (VRM)"
Mortgage in which the interest rate charged by the lender can vary according to some reference index not controlled by the lender, such as the interest rate on 1-year U.S. T-bills or the 11th District Cost of Funds Index. For the lender, this means that as the cost of money increases, the interest being charged on the existing mortgage can be increased, thus maintaining the gap between the cost of money and return. Either the monthly payment, the maturity date, or both can be charged to reflect the difference in interest rates. In addition, the mortgage usually stipulates a maximum annual charge and a maximum total increase in the interest the lender may charge. Under current regulations established by the FHLBB, the interest rate may not be raised more than 2.5% points above the initial rate. The rate can be changed each six months, with no more than 1/2 of 1% change each six months. Variable rate mortgages are more popularly known as adjustable-rate mortgages (ARM).
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