Mortgage Types Explained|
by Apu Hypallathek
For many Americans, part of the American dream is owning
their own home. But for the majority of people not named
"Gates," purchasing a home outright with cash is well beyond
their financial scope. So, they need to get a mortgage to
purchase their home. But getting a mortgage can be a
complex process, especially for first-time home buyers.
Getting a home loan involves signing an agreement with a
bank or lender to pay them a certain amount of interest on
a specified amount of money that they will lend to you so
that you can purchase residential property. The home loans
are then secured against the residential property which they
are used to purchase.
Home loans in America attract different interest rates
according to the institution you lend from, but you will
find that they are generally lower than a standard personal
loan or credit card offered by the same institution. The
bank or lender can usually afford to offer an amount of
interest lower on home loans because of the extended period
of years in which you will be paying interest, as opposed
to a personal loan or credit card which is usually paid off
in a shorter amount of time. Loan repayments on mortgages
are usually paid fortnightly or monthly and have a term of
around 25-30 years.
For the most part, there are two main types of home
mortgages, with a third sub-type gaining some popularity
over the past few years. The first type of home mortgage
is a fixed-rate loan, where the money you borrow is paid
off at a fixed interest rate over a certain period of time,
say 20 or 30 years. This is the most popular type of home
mortgage since most borrowers like to know what their
monthly payments will be over the course of the loan. Plus
the fixed rate mortgage is not subject to interest rate
fluctuations like the next type of mortgage.
The next type of home mortgage is a variable-rate mortgage.
With a variable-rate loan, the interest rate of the mortgage
changes with the interest rate available to everyone. The
rate is tied to the prime rate determined by the Federal
Reserve, and your bank may change the rate on these types of
loans based on the prime rate. When rates turn downwards,
variable rate loans are great. When the rates go up,
though, many borrowers on tight budgets must scramble to
try and pay their monthly mortgage.
The third loan, which is becoming more popular in America
is the bad credit type loan otherwise known as the low doc
loan. Bad credit or low doc home loans may sometimes be
slightly more expensive in terms of setup or maintenance fee
and usually attract a high rate of interest over the course
of the loan. This offsets the lenders increased risk at the
borrower having a poor or indeed no credit history and
possibly defaulting on the payments after getting the
mortgage. These loans are particularly popular with people
who have a bad credit history, people who have low incomes
including those who receive social welfare payments and
people who are self employed.
But, no matter what type of credit you have, there is most
likely a home mortgage that is available to you. So keep
trying and get into your dream home now!
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