Whether it is to buy a house for the first time or to refinance a house, a mortgage is financial agreement that should be chosen carefully.
There are a lot of confusing types of mortgages and careful study of the available options is perhaps the wisest move a potential homeowner can make. Understanding the different types of mortgages can lead to choosing the best mortgage available.
Mortgages involve huge amounts of money. Signing your name to a mortgage is most likely going to be the largest debt you will make.
It is important to find the best mortgage for your personal situation. There are a great number of mortgages available and each is spun just a little bit differently than the next.
The best advice is to consult with either a financial adviser or mortgage broker. Be prepared to ask questions of either professional. To begin, lets consider the basic structure of a mortgage.
The components of a mortgage are seemingly simple, and yet mortgages are somewhat complex. The components of a mortgage are the loan amount, the interest rate, the down payment, fees, type of interest that must be repaid.
Some mortgages are repayment-mortgages, and some are interest-only mortgages. One of the key decisions that potential homeowners must decide is whether to obtain a repayment mortgage or an interest only mortgage.
Interest only mortgages work like this. The monthly payment that is paid to the lender is just the amount of interest that is due each month.
The principal amount of the loan does not drop so throughout the life of the loan the principal continues to accrue interest.
The other side of an interest only mortgage is that the borrower is supposed to make a monthly contribute into an individual saving account or investment such as an endowment.
The goal is that the invested capital will generate enough income and interest over the life of the mortgage that the principal can be paid off at the end of the load. Seems odd? It is odd; however, these are very popular loans.
The point to consider is whether or not the investment or endowment will make enough money to repay the loan. There is risk involved in these kinds of loans and consideration should be give as to how best to weigh the risks involved.
Repayment mortgages are quite a bit more straight forward then an interest only mortgage. The monthly payment that is made each month contains both an interest payment and a capital payment.
This means that a repayment mortgage is safer then an interest only mortgage because at the end of the loan period the mortgage is paid off. The trade off is that these types of mortgages cost more on a monthly basis but there is little to no risk associated with these types of loans.
Mortgage Risks: It is important to understand how the prime interest rate will affect the mortgage that you choose. Historically many people banked on a good economy and then were suddenly faced with a mortgage payment that increased because the prime interest rate increased as well.
Regardless of the type of mortgage it is critical that borrowers understand all of the risks associated with that specific mortgage. These are complicated financial decisions that have a long-term consequence.
It should go without saying that these types of financial decisions should be made with the advice of a financial adviser or a mortgage broker. It is also very important that borrows shop the market and invest the time to become informed enough to make a good mortgage decision.