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Adjustable Rate

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An adjustable rate is an interest rate that fluctuates periodically in relation to an index. Payments linked to an adjustable rate increase or decrease accordingly. A mortgage loan will often have an adjustable rate, permitting the interest rate to change at specified intervals over the term of the loan. Adjustable rates work to transfer part of the interest rate risk from a lender to a borrower. A borrower benefits when interest rates fall and pays a price when interest rates rise. Adjustable rate mortgages usually have a fixed-rate period at the beginning, called the "initial rate". When the initial rate period ends, the adjustable rate will likely increase or decrease, with ongoing fluctuations. There is often a cap or a limit on how high an adjustable rate can be raised. The opposite of an adjustable rate is a fixed rate. An adjustable rate is also known as a variable rate.



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