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Mortgages Explained

Mortgages Explained
Mortgages Explained

There are several types of mortgages that are available, notwithstanding the sub-prime mortgage crisis and its effect on homeowners.

1. Fixed rate mortgage – This is a mortgage where monthly payments remain the same throughout the entire term of the loan.

Note that there are two types of fixed rate mortgages: 15-year and 30-year. The benefits of both are described by Bankrate in this way:

“With 30-year loans, borrowers generally get lower monthly payments even though their rates are higher. That’s because the longer amortization schedule spreads the additional cost of the rate differential – which was roughly 30 basis points in mid-September – over twice as much time. People can buy larger houses or keep their payments on smaller homes affordable as a result.

Fifteen-year mortgages, on the other hand, help buyers own their homes sooner. Even though their payments are larger, they build equity faster because more of each payment goes toward principal rather than interest. The lower interest rate and shortened term make the loans cheaper by lowering the overall interest bill.”

2. Adjustable rate mortgage (ARM) – Unlike the fixed rate mortgage, the ARM rate changes based on the market.

3. Balloon mortgage – According to Bankrate, a balloon mortgage has a “payment schedule similar to that of a thirty year fixed rate loan, although the term of the balloon loan is shorter, most often spanning five to seven years. At the end of the loan term, the outstanding balance must be paid in one lump sum, either out of pocket or by refinancing the home.”

4. Interest only mortgage – In this case, the homeowner is allowed to pay only the interest for a specific period of time on the loan before the principal is paid. After the time has expired, the payments increase to include the principal. Note that this may not be a prudent way of paying a mortgage since higher payments overall will arise.

Given the fact that banks are still not lending, acquiring a mortgage that is right for you may be a daunting task.

However, try to stay away from predatory lenders who offer you a mortgage that seems too good to be true. Research many qualified and certified lenders to compare and contrast the different mortgage types before you sign on the dotted line.


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