Different Types of Mortgages

It is important to learn about the different types of mortgages you can choose from in order to make the best decision that fits your needs and your budget.

Mortgage is the most ideal and practical type of loan for people who wish to own a property but cannot purchase on a cash basis. The lender gives the borrower the amount required to purchase a house and in return, the borrower repays the total amount on a monthly basis for a duration of five, 10, 15, or 30 years. Basically, a mortgage consists of the principal amount of the property divided by the number of years of amortization plus the monthly interest rate. This kind of transaction is legally binding and the lender has the right to forfeit the property if the borrower fails to settle the monthly payment. This is why it is important to know the different home loans before deciding what type of loan to apply.

As you apply for home loans, you will be encountering different types of mortgages depending on the years of amortization, home loan interest rates, and current market values. But to summarize it all, mortgages are categorized into two: fixed rate and adjustable rates.

Fixed Rate Mortgage

A fixed rate mortgage has an interest rate that remains the same throughout the years that the property is being paid. Whether a property loan is applied for a 5, 10, 15, or 30 year duration, the interest rate is determined at the beginning of the first year and it will remain the same until the amortization is paid in full. The good thing about fixed rate home mortgage loans is that the buyer can prepare in advance and set his budget for the entire life of the loan. However, the interest rates are relatively higher than that of the adjustable mortgage. In some instances and if the lender permits, the borrower can apply for recalculation of loan after certain number of years of paying. This usually happens if the current market value depreciates, hence the interest rates decreases. About 75% of home owners are acquiring their properties using fixed rate primarily because of the best home rates available.

Adjustable Rate Mortgages

In contrast with fixed rate, with adjustable rate mortgages, the value of interest changes periodically depending on the type of adjustment the borrower chose. For instance, if the borrower applied for an annual adjustable mortgage, the interest rate will be determined every anniversary of the loan and it will depend on the current market pricing. On the other hand, a two-step mortgage involves the combination of fixed rate and adjustable rate loans. Some loans of this type have a fixed interest rate for a specific period, e.g. five or 10 years, and will be subject to adjustable rates on the next year going forward. Adjustable rate mortgage has a lower monthly amortization compared to fixed rate but it is somewhat risky because the amount to be paid depends on the current market value. This type of loan is advised to be availed for those property owners who can easily adapt to the changes or those who wish to sell their properties before the entire loan retires.

To get a home loan is practical especially for the majority of the workforce who are relying on monthly paychecks. But it is very critical to choose carefully which home loan rates are suitable to your lifestyle, needs, and budget.