A home loan or mortgage is the most commonly used method of financing a home purchase. This loan utilizes the underlying property as security for the debt payment. This characteristic allows the loan institutions to demand very low interest rates in return. Given that home purchasing involves large sums of money, mortgages are usually long-term loans provided by a bank or a mortgage broker.
One big advantage of mortgage loans is that the borrower can choose between different payment options that lenders provide. There is a large availability of mortgages with different terms a buyer can choose from, each with its own merits and risks. Mortgage loans are named after the form of the capital and interest associated payments. Fixed rate mortgage, capped rate mortgage, adjustable rate mortgage, interest-only mortgages are different types of mortgages that have different capital and interest paying forms.
Fixed-rate mortgages are most common among small and mid-sized home loans. Fixed-rate mortgages keep the same interest rate over the course of the loan, and monthly installments stay the same. The normal period to pay off these mortgages is 15 to 40 years. The affordability of these loans depends on current loan mortgage interest rates.
Adjustable-rate mortgages usually start with lower interest rates than fixed-rate loans. This is highly appealing to home buyers during the initial loan period. However, these rates may rise over time according to the prevailing money variable interest rates, and buyers may end up paying more on these mortgages than originally anticipated. Hybrid adjustable-rate mortgages include 3/1, 5/1, 7/1, and 10/1, and they have fixed rates for the first 3, 5, 7, or 10 years, respectively. After that point, the mortgages’ interest rates become variable. Sometimes, adjustable-rate mortgages have a cap option which prevents the adjusted interest rates from going above a certain level. These loans have a higher initial interest rate than plain adjustable-rate mortgages.
Another common form of adjustable-rate mortgages is the interest-only loan. For a specific period of time, borrowers pay only the interest on these mortgages. After that time, the interest is adjusted to include the financial cost of the initial period which at some cases can be lower than prevailing mortgage rates. Buyers, usually, have the choice to pay down part of the principal during the loan’s period.
Given the large variety of mortgages, a prospective home buyer should shop around and perform an in depth due diligence of the options available. Choosing the mortgage that fits one’s budget, lifestyle and prospects can alleviate a lot of the associated risk of taking home debt. Finally, a banker or broker can be of great assistance in choosing the right mortgage depending on your needs and financial situation.