Different Types of Mortgages |
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Different Types Of Mortgages
A mortgage is a lien on a property/ house that secures a loan that is paid out in installments over a period of time. The mortgage secures your promise that you will repay the money that you have borrowed to buy your home. Mortgages come in many different shapes and sizes, with each having its own advantages and disadvantages. Selecting the right mortgage plan for you is important upon your future plans, and financial situation. Buying a home or property is a big step in life, and assuming a mortgage for a home is an even bigger responsibility. While owning a home is very beneficial, it also has many responsibilities. It is always important that you are stable enough and in the right position to handle these responsibilities. Once you decide that you are ready for a mortgage, you need to compare and rate the different benefits of each type of mortgage.
Fixed Rate Mortgage Fixed rate mortgages are the most common type of mortgage used by first time home buyers. They are great fr first time home buyers because they are very stable, and typically the monthly mortgage payment remains the same for the entire term of the loan. Mortgages can be 10 year, 15 year, or 30 year mortgages and they will still have the same loan payment each month allowing for predictability in your housing coast. There are many benefits to having a fixed rate mortgage plan:
There are a few different option with fixed rate mortgages, one being an Interest only, fixed rate mortgage. This allows you to divide up your mortgage into two periods. During the first period your monthly payments will be lower because you will be paying for interest only. In the second period you will have to both interest payments and principle payments. while interest loans can free up cash for other purposes in the first period, it is important to understand that payments will significantly increase during the second period. Biweekly mortgages are mortgages that set up the payment differently. Instead of making mortgage payments once a month, you pay half the months mortgage payments every two weeks. A biweekly mortgage allows you to pay off you mortgage faster because you are paying the equivalent of one extra months payment every year of the loan. Biweekly mortgages are not offered by ever lender, and they require discipline since an additional payment is made every month.
Adjustable Rate Mortgage An adjustable rate mortgage is popular because the usually start off with lower interest rates and lower monthly payments, however the interest rate can change during the life of the mortgage. Adjustable Rate Mortgages (ARMs) have adjustment periods. All ARMs have adjustment periods that are used to determine when and how often the interest rate can change. The initial period of the mortgage which is the first 6 months to as long as 10 years, is a period where the interest rate does not change. After the initial period most ARMs periodically adjust interest rates. At the end of the initial period and at every adjustment period, the interest rate can change based on two factors such as the index and the margin. All interest rate adjustments are based on a published index, and some that are commonly used are the LIBOR and the CMT. These indexes reflect current financial market condition which is why your interest rates can adjust, causing changes in monthly interest payments. All adjustable rate mortgages have caps, ceilings and floors. Caps are used to decide how much an interest rate can increase and decrease at each adjustment period throughout the life of a loan. This allows a the interest rate to never go over a certain amount that you sign for in your mortgage. ARMs also have a hybrid mortgage that has a fixed interest rate for a certain period of time and then the interest rate adjusts throughout the remainder of the loan. Balloon/ Reset mortgage Balloon/Reset mortgages have monthly mortgage payments based on a 30 year amortization schedule, but the entire mortgage balance is due at the end of the 5th or 7th term unless you decide to reset your mortgage at the current rates. This gives you the advantage of low monthly payments of a 30 year loan, but you must pay off the loan at the end of the specified term or exercise your reset option. It is often thought of as a two step mortgage. Many balloon mortgages have a reset option, which means you can reset you mortgage interest rate at the market rate for the remainder of the period. If you are planning to sell your home before the maturity date of the balloon/reset mortgage this type of mortgage is a good option.
Reverse Mortgages This is a new type of mortgage designed specifically to be appealing to older homeowners. In regular mortgages the home owner pays the lender, but in reverse mortgages the homeowners receive money that does not need to be rapid until the home is sold, homeowner dies, or does not use the home as a primary residence. The advantages of reverse mortgages is that you can receive tax advantages, and they can supplement retirement income. Reverse mortgages are a good idea for a homeowner who has a great deal of equity in their home but not other assets or sufficient retirement savings, and they would like to stay in their home instead of down sizing. Reverse mortgages require research to make sure if it is right for each homeowner, and you have to be at least 62 years of age, and the home must be your primary residence. Reverse mortgages are a legitimate type if mortgage designed to help older Americans in their late years. How ever since they are new and not well understood they can be abused by indivduals seeking to rob senior of the equity of their homes so be aware and do your research.
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