Different Types of Mortgages

A Mortgage is probably the biggest loan that one takes to buy property like home. Mortgage can be obtained from banks, credit unions or mortgage lenders. As it involves a big amount that affects one’s future plan, the loan should be ended in good deal. Keeping in mind one’s personal, financial and future plan lenders provide different types of mortgages. Each has its advantages and disadvantages, which we are going to discuss here.

Fixed – In case of fixed mortgage plan, you have to pay a fixed monthly installments with fixed interest rate. With fixed interest rate amount of payment becomes constant and no need to worry about the market fluctuation. But if the market interest rate falls, then you will end off paying more interest. Knowing the monthly payment in advance helps you in planning your budget for the whole period.

The length of the fixed mortgage loan varies as 15, 20 and 30 years. The longer the repayment period lower is the interest rate and monthly installment. So 30-year plan offers the lowest interest rate and so the most preferable one.

Variable – It advocates different monthly installments and interest rate in different time according to the market trends. So your monthly payment can go up or down. If the mortgage rate in the market rises, then you have to pay more that can disturb your plan as far as monthly budget is concerned.

Adjustable – The adjustable rate mortgage plan offers a fixed initial interest rate and a fixed monthly installment for a certain period of time. The interest rate can be below the fixed rate plan and continues till the set period but you have to pay a higher interest rate after the term ends. So it is suitable for those who only want to stay in the purposed home for a fixed period. Thus, if one sells the home before the term ends he will be beneficiary.

Capped – These kind of mortgage acts in-between the fixed and variable mortgage plan. Here the interest rate can go up or down but can’t cross a fixed point. That means that variable interest can’t go beyond an upper limit and also can’t come down to a lower limit. So, if market interest rate rise above the upper limit, you don’t have to pay an extra amount. But it will not be more beneficial than the fixed mortgage when the interest rate crosses the upper limit as fixed mortgage interest rate always remain below that capped rate.

Discounted – Here payments are fixed on a discounted rate below the variable rate for a specific period of time. This helps in saving certain amount of money by paying a lower monthly installment. A gradual reduction of discount rate doesn’t make sudden increase in payment with the end of discount period. But if interest rates rise during the discount period you have to pay more monthly installment.

Flexible – This type of mortgage plan grants you the flexibility in paying of the loan amount. That means you can pay more at a time when you have or you can take payment holiday. Also if you payoff your mortgage amount a little early that will help you in reducing interest rate.

Tracker – This type of mortgage follows the interest rate fixed by the principal financial institution of a country. For example the Bank of England fixed a base rate for a particular period of time. When the base rate decreases then you have to pay a less amount as monthly installment but if the base rate raises your payment also increase.