What are the features of different types of mortgage?
Mortgage is a loan secured by a property or a house and repaid in installments over a set period of time. The mortgage is a promise that the money that has been taken will be returned back in due course of time. Thus, mortgage can be termed as the greatest financial obligation we make in our life.
There are different types of mortgage, each one having its own advantages and disadvantages. Let’s now check out the different types of mortgages along with their special features which might help you to choose the right one for you.
The different types of mortgage available
There are 2 basic types of mortgage loans. These are –
* Fixed-rate mortgages.
* Adjustable rate mortgages (also known as ARMs).
Let’s now check out the special features of these mortgage loans.
1. Fixed-rate mortgage:
This is the most popular form of mortgages. The borrowers have to pay a fixed interest amount and monthly payments over a period of time, like 15 or 30 years. So, this type of mortgage gives peace of mind to the borrowers since the interest rate doesn’t fluctuate with the market interest rate. There are various types of fixed-rate mortgage such as –
* Fixed-rate balloon:
This loan works like a traditional fixed-rate mortgage initially. The borrower needs to pay a fixed monthly payment and interest rate for a usual period of 3-10 years after which the whole loan becomes due. The borrower, at that time, has to pay the total loan amount in cash or use refinancing.
* Interest-only mortgage:
This loan allows the borrower to pay only the interest for a set period of time. After the initial period, the borrower may renew the mortgage, pay the principal amount or change to traditional fixed-rate mortgage.
* Bi-weekly mortgage:
A bi-weekly fixed-rate mortgage allows a borrower to make payments twice in a month. This form of mortgage, if properly planned, can help you to pay the total loan amount of a 30 year fixed-rate mortgage within 18-20 years.
2. Adjustable rate mortgage:
The borrowers of this mortgage have to pay interest charges and monthly payments which fluctuate with the market rates. This loan is also popular because ARMs generally start with low interest rates and monthly payments for a fixed initial period. After which the interest rates start fluctuating with market rates. The different types of ARMs are –
* Interest-only ARM:
This form of mortgage allows a borrower to pay only the monthly fixed interest for an initial period of time after which the interest rates fluctuate with market interest rates. The main feature of this loan is its low monthly payments.
* Convertible ARM:
This loan allows the borrower to convert to a fixed-rate mortgage within a set period of time. Lenders charge an amount for this conversion, so check out the rates first.
* Graduated payment mortgage:
This loan has very low initial interest rate, after which the rate increases annually for a period of 3-5 years. After this period, the interest rate remains the same for the rest of the term.
It is advisable that you go through the different types of mortgage before finalizing on the one that suits you. Remember that choosing the right mortgage means doing your homework about the different types of mortgage available.