A variable loan type is the one wherein the interest rate is calculated on the basis of changing interest rates of the market. The calculation of the interest rate is done with respect to the outstanding balance and the variable loan is connected with an underlying index or benchmark like the rate of federal funds.
From the perspective of the borrower, the benefit of the variable loan can be explained with the low rates of interest as compared to the fixed loans. In most of the situations, the beginning of the term includes a lower interest rate, which gets adjusted through the loan term. This is beneficial in a market that has a declining rate of the interest, which will decrease the loan payments. However, if the underlying rate of the index rises, the payments on the interest tend to increase.
The most common loan types to choose from while buying or investing in a home are the fixed and variable loans. While the former leads to locking the interest rate over a certain time period the latter includes a fluctuating interest rate. In the fixed loan, the repayments remain unchanged whereas the variable loan interest rates can increase and decrease.