Choosing a right Mortgage

How to choose a right mortgage?

A mortgage is a special form of secured loan guaranteed by an immovable asset such as a house or piece of farmland and paid over an agreed period.  Knowing the different types of mortgages available to borrowers is the first step towards choosing a right mortgage. During the housing crises of the last two years, many people could not sustain their mortgages because predatory lenders had influenced them when choosing a mortgage.

TYPES OF MORTGAGES

1. Fixed rate mortgage

Most first time homebuyers choose Fixed-rate mortgages because they are stable. On this type of mortgage, the monthly mortgage payment remains constant throughout the loan period.

Advantages of a fixed-rate mortgage

• Your mortgage payment is not affected by increased interest rates.
• You personal finance budgeting is eased since you know what your monthly mortgage expense will be for the entire term of your mortgage.

Disadvantages of a fixed-rate mortgage

• Your mortgage interest rate does not decrease even if interest rate index changes.
• The interest rates are usually higher on a fixed rate mortgage hence you may not qualify for a loan as large as one on adjustable rate mortgage.

2. Interest-Only, Fixed-Rate Mortgages

For this type of mortgage loan, you make interest-only payments for the first loan term, and then pay both principal and interest for second and last loan term.

Advantage of an Interest-only fixed-rate mortgage

· You significantly free up your cash during the first period of the loan.

Disadvantages of an Interest-only fixed-rate mortgage

· The principal amount does not reduce during the first period of the interest only, fixed-rate mortgage.

· When you begin paying for both the principal and the interest in the second period of the mortgage your monthly payments will be significantly larger.

· You may find yourself overextended when you begin paying both principal and interest and end up losing your home to foreclosure.

3. Bi-weekly Fixed-Rate Mortgages

With this type of mortgage, you pay half the monthly mortgage payment every two weeks, which means that you actually make 26 payments a year.

Advantage of a Bi-weekly fixed-rate mortgage

· You pay off you mortgage faster because you make an equivalent of one extra monthly payment every year of the loan.

Disadvantage of a Bi-weekly fixed-rate mortgage

· Your cash may be tight since you make an equivalent of one extra monthly payment every year of the loan.

4. Adjustable Rate Mortgage

An adjustable rate mortgage (ARM) is a mortgage in which the interest changes periodically, according to corresponding fluctuations in an index and margin.

However, most ARM’s have an initial period during which the interest rate remains fixed. This period can range from 6 months to as long as 10 years.

Advantages of an adjustable rate mortgage

· If interest rates are high when you get your mortgage but drop during any adjustment period, your monthly payment may decrease

• Because the initial interest rate is usually lower than a fixed-rate mortgage, you may qualify for a larger loan amount
• An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money.

Disadvantages of an adjustable rate mortgage

· If the interest rate on your mortgage increases, your monthly payment will also increase

5. "Hybrid" Adjustable Rate Mortgages

This type of Adjustable Rate Mortgage has a fixed interest rate for the initial period and then the interest rate adjusts after the initial period of the loan, like a conventional ARM.

Hybrid ARMs have several variations such as the 10/1, 7/1, 5/1, and 3/1. The first number (7 for example) is the length of the initial period, during which the interest rate does not change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, the interest rate on a 7/1 ARM won't change for the first 7 years, but can change in the eighth year and be adjusted every year after that up to a maximum amount.

6. Balloon/Reset Mortgages

A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period.

Advantages of a Balloon/Reset Mortgage

• You usually have a low monthly payment

• You may qualify for a larger loan amount with a balloon/reset mortgage because you usually have a lower monthly interest rate.

• This type of mortgage is a good option for those who plan to sell their home before the maturity date.

Disadvantages of a Balloon/Reset Mortgage

• If interest rates increase during the term of the balloon loan, you may have a large increase in your monthly payments when you reset or refinance your mortgage.