TYPES OF MORTGAGE AND HOW THEY IMPACT YOUR FINANCES
Introduction
You probably clicked on
this link because you’re interested in owning a home. Maybe now or somewhere
down the line but everyone wants a home, we all want to get the burden of
annual or monthly rent off our bill and realise our homeownership dreams.
Well, except you come
upon a huge cash windfall, earn more than the average income-earner or you’re
an uber-successful businessperson, you need to plan extensively and weigh all
your options before embarking on a housing project.
Funding a home is no
easy feat and most individuals require debt instruments to execute such
projects in good time. The most common instrument among these is Mortgage which
guarantees the borrower a sum of money to make the real estate purchase and the
debt is serviced over a while. In return, the property is pledged to
the lender who is reserved the right to foreclose the asset in the event of a
failure of the borrower to fulfil the contractual agreement.
Notwithstanding this
point, which might appear like a downside, a mortgage is largely favoured by real
estate investors due to the large funds it affords and its long-term repayment
flexibility, these are two things personal loans, on the other hand, do not
guarantee.
Even though a mortgage has
its fair share of pros and cons, there are salient facts about it that
prospective lenders must know before utilising this option and like every kind
of loan, extensive consideration must be paid to the interest. To further
improve your understanding of the subject matter, we have shed more light on
the popular mortgage types below:
Fixed-rate/traditional mortgage:
This type of mortgage
guarantees that the borrower pays a fixed rate over a certain period; which
could be short-term, mid-term or long-term. This mortgage is insusceptible to
the fluctuations of the money market nor the oscillation of inflation. That is,
if you get a 30-year fixed-rate mortgage in 2020 at 6%, you will keep repaying
it at that same rate until completion in 2050. Regardless of market interest
rates, your mortgage rate change. To give our customers top-of-the-class
services, we also offer this type of mortgage.
Adjusted-rate mortgage (ARM):
Here, the lender pays
the mortgage at a fixed rate for a predetermined time and upon the termination
of that time, the rate reverses to the going market interest rates. Simply put,
under these terms, a 10-year loan obtained in 2020 will be repaid at a fixed rate for a time, say 5 before the adjusted-rate terms kick in and it
becomes subject to the going market interest rate. This type of mortgage is generally
not considered the best because a borrower may end up paying double the loan
amount based on the stability, or lack thereof, of the money market in the
country. Generally, the initial rate of an ARM is often lower than a fixed-rate
mortgage because chances are that it will surpass it in the long run. It also
has less stringent qualification criteria.
Interest-only mortgage:
The least popular of the trio and commonly
avoided is the interest-only mortgages. They are often structured in two
parts: the first where you pay the interest on the mortgage alone and the
second where your pay both the principal (amount loaned) and interest at a
variable rate that could be as high as three times the amount borrowed. For
instance, a 30-year interest-only mortgage at a 10% rate begins with the borrower
paying only the interest for a certain time, say 10, before the switch to the
repayment of both principal and variable interest.
Begin your homeownership journey today!
Source: Green Park Estate
Further reading:
Definition of mortgage, types and examples
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