Unless you make a lot of money or have saved up several hundred thousand dollars, then you will probably need to get a mortgage in order to purchase your first house. While it can be somewhat daunting to navigate the choices available, knowing the basics of what types of mortgages are available will help to make the decision easier.
Fixed Rate Mortgage
A fixed-rate mortgage is a mortgage that has a fixed rate of interest. That is, the interest rate does not change for as long as you have the mortgage. Despite fluctuations of loan-to-value ratios in the market, you will be secure in knowing that your rate will not go up. This means that you know exactly how much you have to pay for every installment until your mortgage is paid off in its entirety.
When you have equal payment installments, you will be able to plan for a long period of time. While fixed-rate mortgages can be given to homeowners for a period of time that goes anywhere from 10 to 50 years, the most common length of amortization is 30 years. This allows for smaller monthly payments, and the length is not so daunting as it could be.
Fixed-rate mortgages are the most common type of mortgage that home buyers choose to have. The security of these types of mortgages is very appealing, since the interest rates will always remain steady. Even in markets where the interest rate is high, fixed-rate mortgages have remained appealing. This is despite the fact that if market interest rates lower overall, fixed-rate mortgage borrowers still must pay their high interest rate, unless they refinance their mortgage.
One of the appealing features about a fixed-rate mortgage plan, is that included in the set payment installments, a homeowner may still make a larger payment than is called for, and the extra capital is applied directly to the initial sum of borrowing, the principal. This means that your overall principal is decreased by however much more you choose to pay, which then decreased the length of time it takes you to pay off your mortgage, and decreases your interest payments in the long run. These extra payments are not necessary, though, and if you have one payment installment where you don’t have enough to make the extra payment, it will not hurt you.
Variable Rate Mortgage
Variable rate mortgages are also known as adjustable mortgages. This is because the mortgage interest rate is adjusted in response to changes in the market loan-to-value ratios. Lower market rates means that you have to make lower payment sizes, whereas higher interest rates in the market means your payments will be higher.
One of the most appealing things about variable rate mortgages is that there is a good chance that, depending on the shape of the yield curve in market conditions, the initial payments in the mortgage will be smaller, meaning more capital can be put into the mortgage itself to reduce the overall size of the mortgage. However, since variable rate mortgages are dependent on market values, payment installments will most likely go up in size putting more strain on your resources down the line.
Another advantage variable interest rates have over a fixed rate is that variable interest rates generally have a much lower interest rate overall, and when the market shifts in your favor you are able to pay off your mortgage much quicker and with less interest.
Like what it sounds, a convertible mortgage is a mortgage that can be converted into another type of mortgage at any time. This is very good for variable mortgages, since you can convert it into a fixed-rate mortgage when market interest rates are low, meaning that you can keep your payments at a reasonable price if the market should go up again. Convertible mortgages provide flexibility that is not found in mortgages that are not convertible.
A bridging loan, also known as a caveat loan or a swing loan, is different from a mortgage in that it’s generally for very short periods of time, from anywhere between 2 weeks and 3 years, before it needs to be repaid. They are typically chosen to be taken out by individuals who are waiting for the arrangement of a longer-term financing to come through. It is also known as bridging finance in some places, such as South Africa and the UK.
Since bridge loans are more risky ventures for banks than longer-term interest loans such as mortgages, they tend to have a steeper interest rate and be more expensive than other types of loans and financing. The borrower may also have to provide some sort of cross collateralization, and the lender may wish to have a lower loan-to-value ratio in order to counterbalance the risks involved. However, bridge loans are easier to acquire than larger loans such as mortgages.
In real estate, bridge loans are often used to close quickly on a piece of property, or to retrieve the property from foreclosure, and to secure a long-time financing from taking advantage of a short-term opportunity, other loans include commercial bridge loans, that are used by businesses i.e. to acquire office space or other reasons.
No matter if you’re a first time home buyer or if you have several mortgages under your belt, it is important to research the market and know your stuff before you approach banks for mortgages. There are pros and cons to every venture, so make sure that you don’t just grab the first offer that comes around. Shop around, and know what the competitors are offering.
Since a mortgage will be with you for years, make sure that your minimum payments are not what you can just barely afford. Circumstances change, so try to get a mortgage rate that you can easily pay each month. In this way, if you have an emergency, you will be less likely to be faced with real difficulties in paying your bills, and in the meantime you can always add extra to your monthly payments in order to reduce the size of your debt.