Mortgages are loans in which your house functions as the collateral. Any financial institution capable of giving loans, for example a bank, could lend you a large amount of money which you must pay back with interest over a certain period of time. If you fail pay back the money back within the stipulated period of time, or delay payments for too long, the interest rate increases and the lender can take your property through a legal process.
Houses are expensive, and for most people, applying for a mortgage will be a crucial step towards securing their dream of owning a home. Mortgages could be used to purchase a property and then steadily paid back over a period of years. You will usually have to seal the deal by agreeing to pay a deposit first, and then the bank agrees to fund the rest of your payment over the set period of time.
Here are two types of mortgages to know about:
#1. Fixed rate mortgage
With fixed rate mortgages, the agreed monthly payment remains the same for the life of the loan. The interest rate is locked in forever and does not change. Loans have a repayment life span of 30 years or less but short loans will have larger monthly payments that are offset by lower interest rates and lower overall costs.
Your interest rate and monthly principal and interest payments remain the same for the life of your loan. Fixed rate mortgages allow you to budget more easily and might be a good choice if you plan to stay in a home for a longer period of time. The monthly payment remains the same for the life of this loan.
#2. Adjusted rate mortgage
These are mortgages which using a variable interest rate calculated by adding a premium to a specific benchmark rate. With adjusted rate mortgages, you are guaranteed to repay the full load by the end of the mortgage term. Because the interest rate is not locked in, the monthly payment for this type of loan will change across the life of the loan.
Most adjusted rate mortgages have a limit on how much the interest rate may fluctuate, as well as how often the interest rate can be changed. Your interest rate and monthly principal and interest payments remain the same for an initial period, and then adjust annually.