If you are considering going in the path of mortgage to finance your dream of building your first house, it is not a far-fetched idea. You should however consider carefully and with the help of experts the various types of mortgages available and the details involved since each mortgage type have its own interest rate and flexibility; all of which affect how much the mortgage will cost you and when it will be paid off. Basically, mortgages vary from lender to lender based on the terms on which you borrow, the terms on which you pay the money back and how much they will charge you for the privilege of being granted the loan.
Most times, mortgages differ based on interest rate and the re-payment structure. Interest rate can be fixed or floating and there are various repayment structures to choose from. As a borrower, when you approach the lender and want to begin the procedure of filling out your mortgage loan application, it is important to know the advantages and disadvantages of each mortgage type and consider your options very well before settling on which one to go for.
Fixed Rate Mortgages
When the interest rate on your mortgage does not change but remains the same throughout the entire life of the loan, you are operating a fixed rate mortgage which usually come in terms of 10, 15, or 30 years. For a fixed rate loan, the interest rate is set at the date you take out your loan and remains the same throughout the term of your loan, irrespective of whether bank interest rates rise or fall. You can however choose to re-fix again after a certain period which would be stated in the terms of your mortgage note or move to a floating rate. Also people who get a fixed rate mortgage when interest rates are high can refinance their mortgage when the rates go down.
The greatest advantage of a fixed rate mortgage is that it is predictable. The debtor knows exactly the period in which the interest and principal payments will be for because the rate agreed upon in the beginning is the rate that will be charged for the entire life of the mortgage. This in turn allows the person to budget properly since the monthly payments are fixed.
One of the major disadvantages of this type of mortgage is that the interest rates are higher than the rates on other types of loans which mean that although the monthly payments are fixed, they are usually very high. Also, there is a limit on how much you can lift repayments or make large sum payments without you being charged so basically on the long run, fixed rate mortgage can be very expensive.
Floating or Variable Rate Mortgages
This kind of mortgage is also called Adjustable Rate Mortgage (ARM) which means it gives the lender the opportunity to adjust the interest rate on the mortgage from time to time in accordance with the agreed index stated at the commencement of the loan by all parties. In this type of mortgage, interest rates will either go up or down depending on change in interest rates in the wider market. This means your repayments may go up or down if you are operating this type of mortgage.
One of the major advantages of this mortgage is that you have the privilege of making changes without any consequence. Also, the rates on this type of mortgage are lower than those on the fixed rate mortgage. The disadvantage is that you do not have a specific fixed amount every month so when rates go up, your repayments can go up, putting a strain on your budget. The loan is considered to be rather risky because the payment can change from year to year in significant amounts.
This operates like the fixed-rate mortgage except the monthly payments are lower because of a lump payment at the end of the loan. The reason for the payments being lower is because what is being paid monthly is the interest rate.
Sometimes, people can take a mortgage by mixing both the fixed and variable rates. This way they can enjoy the benefits of both types of mortgages but as said earlier, seek professional advice and be sure to ask all the right questions before you sign the dotted lines. You don’t want to regret your decision at the end of the day.