There are two basic types of mortgages: fixed-rate and variable rate. A mortgage is an agreement between a borrower and lender, whereby the borrower pledges assets (usually consisting of residential land) as collateral. When the loan is made, the assets’ value is used as a guarantee that the borrower will repay the mortgage on time. Most mortgages have two phases: the first is the introductory phase with no set date, and the second is the repayment phase. In the introductory phase, interest is charged at a fixed rate. In the repayment phase, payments are made on an agreed schedule. This article will discuss Choosing The Right Type of Mortgage.
There are two types of mortgage payments: fixed rate and variable rate. A fixed-rate mortgage also called a ‘secured’ mortgage, has a set amount of interest rate and term (generally from three to ten years). During the term of the mortgage, the interest rate and amount may change according to economic conditions. Fixed mortgage payments remain the same for the entire period, usually between two to ten years. A variable-rate mortgage, otherwise called an ‘unsecured’ mortgage, differs in its payment structure.
Fixed-rate mortgages pay fixed interest rates throughout the whole loan period. When the term or the interest rate changes, the amount paid out also changes. With a variable rate loan, the lender adjusts the interest rate and the amount owed every month. This means that your monthly payments may vary from month to month and year to year.
The two types of loans – fixed rate and adjustable rate mortgage – are very different from one another. An adjustable rate mortgage is usually a type of interest-only mortgage loan. These types of loans require a minimum payment on the principle each month. If the interest rate remains the same through the life of the loan, then after the end of the fixed-rate period, the adjustable-rate mortgage will charge you a certain amount extra. Adjustable rate mortgages offer the convenience of flexible payment options during the interest-only or fixed-rate period of the loan.
Mortgage lenders offer different types of mortgages. You can find information on the different types of loans on the Internet. Here, you can see how the pros and cons of each one of them play out. Here, you can learn about the pros and cons of the interest-only mortgages and the fixed-rate mortgages.
An interest-only mortgage is a simple mortgage wherein the mortgagor pays only the interest as payment each month. As the loan amount grows over time, the mortgagor pays only the principle. In general, this type of loan is suitable for first-time homebuyers because the interest rate is lower than that on a traditional or adjustable-rate mortgage. As a result, this loan amount can be financed until the property is sold or until the loan matures.
Adjustable-rate mortgages are mortgages in which the mortgagor is charged an interest rate that varies according to the rise and fall of an interest index. On a regular mortgage, the mortgagor pays a certain interest rate while on an adjustable-rate mortgage, the rate may vary for consecutive terms. The advantages of the adjustable-rate mortgage include its ability to create an opportunity for growth of the property’s value; its capacity to provide for large payment adjustments in times of financial stress; and its ability to spread risks among the lenders through varying rates.
Balloon mortgages are fixed-rate mortgages in which the mortgagor is required to pay the principal, and interest plus a certain amount of amortization (commonly referred to as ‘coup’ payment). This payment is usually made every five years or when the property’s worth is expected to increase by a certain percentage. A balloon mortgage’s advantage is that it provides for considerable growth potential and is relatively easy to qualify for. Its disadvantages include its potential for negative amortization, in which case, the principal and interest will be due at the end of the term, regardless of the actual property’s worth. Balloon mortgages also come in various forms, including an open end and closed-end. Open-end types of balloon mortgages allow the owner to pay a balloon amount over the course of five years or more; while a closed-end type is required to pay all the principal and interest during the life of the loan, either all at once or in increments.