Different Types of Mortgages

In order to purchase a property, we need to qualify for a loan. This is why we need to prepare all the necessary documents to ensure that we will have a good mortgage term. The terms will largely depend on the current state of the market and our credit score. The type of our mortgage will also influence it.

There are several types of mortgages available in the market. Learning about them will help you choose what type of mortgage suits you best. Let us understand the two basic categories of mortgages, the fixed rate mortgage and the adjustable rate mortgage. Do not be confused as there are more types of mortgages. Examples of them are interest only mortgages and the repayment mortgages.

Fixed rate mortgage:

This is the commonly used type of mortgage. Here, the interest rate remains the same throughout the life of the mortgage. The benefit of using this type of mortgage is that the monthly dues are predictable. You will be able to prepare the amount in advance and there won’t be any unexpected expenses.

There are different types of fixed rate mortgage as well. These are the 30 year fixed rate mortgage, the 15 year fixed rate mortgage, the biweekly mortgage and the convertible mortgage. In the past, the 30 year fixed rate mortgage was the usual term used. The monthly dues are low and the interest rates are fixed. However, there are more options today. Some can pay their loan in twenty, twenty-five and even forty years. Although you can choose what to use, you need to bear in mind that the longer the mortgage is, the more total interest you pay.

You may opt to use the 15-year mortgage. However, the monthly payment will be more expensive. Although this is the case, you will save more in terms of interest expense. Moreover, the property will be totally yours after 15 years.

Adjustable rate mortgage:

If the fixed rate mortgage has a fixed rate, the interest rate of this type of mortgage will depend on certain factors. This means that it will change as the times change. What is great about this type of mortgage is that it has low initial interest rates. However, this can lead to a lot of troubles once the interest rate increases. At some point, this type of mortgage can be very risky.

When you choose this type of mortgage, you need to understand four essential factors like the initial interest rate, the adjustment interval, the indices and the margins that lenders add to the different indices.

Although the interest rate can change, the adjustable rate market follows certain provision to ensure that the consumers are protected. An example is the rate caps. The rate shall not exceed this level so that the borrower can still afford the monthly payments. There are also limits as to the amount that the borrower will increase during the adjustment period.

There are several options available for you. What is important is that you understand them so that you can choose the best type for you.

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