DIFFERENT TYPES OF MORTGAGES – A GUIDE THROUGH THE MAZE
So you’re thinking about buying a house? Your journey starts from afar as you look at properties that catch your eye. You then need to look at different types of mortgages and navigate your way through the mortgage maze.
Regardless of your income status, most banks and financial institutions have instruments they use to get you onboard. This is perhaps where the most modern financial apparatus for the mortgage market exists. Since they are new, not a lot of people know about or even understand them.
There are many different and opposing terms you will come across, that could land you in hot water further down the line if you don’t understand them. It’s easy to get lost in it and give up, so here’s a guide on the different things you need to look out for.
Interest-only vs Capital Repayment
There are lots of ways to get your foot in the door regarding mortgage plans. There are two main types, the interest-only and the capital repayment plans.
- Interest-only: This method of paying off your mortgage is the more flexible option. You’re only going to be paying interest on the amount of money you borrowed until the end of the term. If you borrowed $80,000 at a 3% rate over 25 years, you’re only going to be paying $2,400 a year, which works out to $200 per month. The capital stays the same for the length of the contract. At the end of the term, you’re tasked with paying the entire capital back. In essence, you’re given plenty of breathing room to get your finances in order and save up for one final large lump sum payment at the end of those 25 years. You do also pay a small amount of the capital every month together with your interest so as to slowly bring the capital to a close as well
- Capital repayment: Unlike interest-only, the interest rate is not frozen. It can fluctuate as the economy fluctuates. If the bank wishes to increase your APR then you will need to pay back more every month. This can catch people off guard. However since you’re paying off the capital you owe at the same time as the interest, the value of your mortgage decreases. This is coupled with the predicted value rise of your house. As the APR is not fixed to the size of the original loan, the amount you pay back in interest also decreases in line with the capital. This is why you end up paying less than the interest-only method.
Fluctuations Over Time
Variable/adjustable interest rates are used by banks to entice you in. They will remain low for a while but they will eventually shoot up to normal rates. To see if this is something that you would consider, read this Free Mortgage Advice carefully. They have an in-depth knowledge of services and fees, that catch many first-time mortgage buyers out. They can also show you how to use the complaints procedures when you feel you’ve been wrongfully charged or treated by the bank.
These are the two types of mortgages you need to learn about first. Depending on your financial situation you will need to decide which is better for you and your family.
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