Mortgage Types
Mortgage loans have made our lives easier. In case of unavailability of mortgage loans an overwhelming majority of people would not have been able to afford expensive purchases such houses and cars etc. Mortgage loans have evolved into various types over the years. You can now choose a mortgage loan suited to your distinct needs from a wide array of available options. Some of the most popular types of mortgage loans are discussed below:
- Fixed Rate Mortgage Loans - Fixed rate mortgage loans are loans extended at a fixed interest rate. This interest rate and monthly mortgage payments will not change all the way during the term of the mortgage loan. Fixed rate mortgage loans are still the most popular type of mortgage loan because of their predictability. A disadvantage of fixed rate mortgage loans is you will have to pay a higher interest rate even when market interest rates are declining.
- Adjustable Rate Mortgage Loans – As evident from the name adjustable rate mortgage loans are loans whose interest rate is dependent on market conditions. Although adjustable rate mortgage loans have higher risk than fixed rate mortgage loans they also offer higher returns. You can accumulate substantial savings with adjustable rate mortgage loans in times of falling interest rates because interest rate on your mortgage loan will decline along with your monthly payments. However the opposite is also a possibility i.e. in times of rising interest rates you may end up paying more than those with fixed rate mortgage loans.
- Convertible Mortgage Loans are adjustable rate mortgage loans that can be converted to fixed rate mortgage loans after a certain period or at a specified time. The most important advantage of convertible mortgage loans is that they allow you take advantage of falling interest rates along with the opportunity to lock in when the interest rates are at their lowest.
- Balloon Mortgage Loans are loans in which you only have to pay interest in your monthly payments. Principal amount of the loan is not amortized over the life of the mortgage loan and becomes due at its end. You can pay the outstanding debt either from your own pocket or by refinancing the loan. Balloon mortgage loans make you eligible for a larger mortgage tax deduction. Balloon mortgage loans usually have shorter terms than conventional mortgage loans.
- Discount Mortgage Loans are loans for which interest rate is set below the market rate for a specific time period at the end of which it will be increased to match the market interest rate. As with adjustable rate mortgage loans, monthly payments for discount mortgage loans can both increase and decrease. Most buyers wrongly assume that discounted interest rate will last throughout the life of the mortgage loan. This is an incorrect assumption as interest rate in all discount mortgage loans will be increased to market rate at the end of the discount period.
- Cash back Mortgage Loans - Cash back mortgage loans are loans that pay you a lump sum amount at the end of the mortgage term. Most lenders have their own policies. Consequently this rebate can be either a fixed amount or a percentage of the total loan amount. However cash back mortgage loans have certain restrictions such as repaying the loan within the mortgage term etc.
- Flexible Mortgage Loans - Flexible mortgage loans have been recently introduced to meet the ever changing requirements of customers in today’s fast moving world. They are also called (1) personal choice mortgages (2) open plans or (3) freedom mortgages. Some features of flexible mortgage loans include higher monthly payments, no payments for a specific time period, lump sum payment or increased/decreased frequency of payments etc.
- Capped Mortgage Loans - Capped mortgage loans are a mixture of fixed rate mortgage loans and discount mortgage loans. The interest rate on such loans is capped at the market rate for a fixed time period. However if the market rate falls during this time you will have to pay the lower rate. Some capped mortgage loans have both upper and lower caps on interest rates. Capped mortgage loans are a good choice for people who (anticipate and) want to benefit from falling interest rates but want to make sure they remain within their budget.
- Biweekly Mortgage Loans - Biweekly mortgage loans are different from conventional mortgages in terms of their payment schedules and payback period. Buyers make fortnightly mortgage payments instead of the usual monthly ones. This loan is offered by most mortgage companies for the convenience of customers and is similar to conventional mortgages in all aspects except the payment schedules.
- Government Guaranteed/Backed Mortgage Loans – Government guaranteed mortgage loans are subsidized loans provided by Federal Housing Administration to first time home buyers. It is easier for buyers to qualify for these loans. Government guaranteed mortgage loans offer easier terms, lower interest rates and down payment than most other mortgage loans.
You should keep in mind your distinct needs (such as your budget, desired payback period and interest rate etc) when shopping for a mortgage. Never buy the first suitable mortgage loan you come across. It pays to compare features of different types of mortgage loans as well as comparing same type of mortgage loans across mortgage companies. Assess the mortgage loan very carefully to ascertain that you are not paying for services that you do not require or did not opt for. Mortgage points, home insurance, home warranties and hazard insurance are prime examples of these extra costs. Choose a mortgage broker with an immaculate record. It is always preferable to choose a broker recommended by a friend or relative. Do not let your emotions overwhelm you and bulldoze all common sense. Do not (try to) handle every smallest detail by yourself. Let the professionals do their job and plan to enjoy your new home!