Home Mortgages – Enlighten Yourself to the Different Mortgage Plansby Enlighten Yourself
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Even for those who are not new to home loans, mortgage can still be too complex to work out. The field’s numerous components which are technical in nature usually intimidate and cause anxiety on buyers. People are worried about not being able to make the payments due to the possibility of unexpected increase in the interest rate, lowering of income, inflation and many other factors; all of which are just normal since it is probably the most expensive purchase they will ever make in their whole life and naturally, they are afraid of losing money.
Sadly, even mortgage professionals have admitted that approximately 70-80% of buyers either get the wrong mortgage plan or overspend on it. It has been stated that this implies that the information presented by mortgage companies are controlled to cause homeowners to commit mistakes and lose money while increasing the companies’ profits. Thus, to avoid falling into their trap, you must be already educated on the mortgage industry and the different mortgage plans before you set an appointment with your broker.
What exactly is a mortgage?
According to the Merriam-Webster Dictionary, a mortgage is “a legal agreement in which a person borrows money to buy property (such as a house) and pays back the money over a period of years”. It is facilitated by a mortgage broker, an agent provided by companies such as Mortgage 24/7 which can be found at mortgagebroker247.com.au. Here, mortgage brokers are assigned to introduce mortgage plans and discuss it pros and cons based on the buyer’s finances. And because the field is a fast evolving one, there are actually a lot of plans being offered to homeowners.
Finding a mortgage that is perfect for your needs…
Here are the most common types of home mortgage along with their advantages and disadvantages:
Fixed rate mortgage involves 15 or 30 years of monthly payment. In a 15-year fixed rate mortgage, monthly payment is higher but with a relatively lower interest rate than in 30-year fixed rate mortgage.
Advantage: Since the rate of interest is fixed, buyers do not have to worry about increase in monthly payments.
Disadvantage: Buyers are not affected by the decrease in overall interest rate either.
When to consider it: Get a fixed rate loan when 1) interest rate is low (around 8%); 2) you are more comfortable in a stable monthly payment; and 3) you are planning to live permanently in the house.
Adjustable rate mortgage involves varying interest rate, thus, monthly payment may increase or decrease throughout the duration of the loan.
Advantage: It is easier to qualify since it does not require too much income and initial interest rate is 2 to 3 percent lower than fixed-rate mortgage. Furthermore, if the interest rate is high at the moment, there is a good probability that it will decline in the next months.
Disadvantage: Because interest rate is fluctuating, monthly payments can rise extremely.
When to consider it: ARM is convenient if you are planning to own the house for only a couple of years or so and you have a modest paycheck.
Graduated-payment mortgage involves low initial payments which gradually increase at a fixed rate every year for 5 to 10 years then lowered again.
Advantage: It is affordable in the early years.
Disadvantage: Relatively higher interest rates are set by mortgage banks.
When to consider it: If you are a young buyer who is just starting to build your career and expecting promotion and salary raise in the future, you can avail this mortgage plan.
Growing equity mortgage is similar to graduated-payment mortgage except that the interest rates are not lowered after 5 to 10 years.
Advantage: Its interest rate is 0.25 to 0.50 percent less and it is quicker to pay off than other mortgage plans.
Disadvantage: Payments consistently increase regardless of your income.
When to consider it: GEM is ideal for someone with steadily increasing income and for those who are planning to retire after about 15 years.
Balloon loan is similar to 30-year fixed rate mortgage except that the loan must be paid off in cash or refinance after five, seven or 10 years.
Advantage: It is easier to qualify since the interest monthly payment begins as a low rate.
Disadvantage: While some mortgage plans have caps to protect homeowners from fluctuating rates and payments when it is due, the balloon type of loan does not have caps.
When to consider it: Opt for the balloon loan only if you are sure to sell your property before the loan matures.
For the perfect mortgage, select the best…
Fixed-rate mortgages, adjustable-rate mortgages, graduated-payment mortgages, growing-equity mortgages and balloon loans are just the basic types of home mortgages available through various lending companies. In the end you can also read more on this site for good information. Mortgage brokers may suggest other plans such as the 20-year fixed, 7-year balloon, 7/1 ARM and 7/23 two-step, which all seem complicated at first sight but with the proper research, understanding the different types of mortgage plans will be easy. Most of all, it will help you choose the right mortgage plan and maintain smooth monthly transactions all throughout your loan.
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