Types of mortgage
Different types of mortgages in West Auckland
People typically take a home loan, usually called a mortgage, when they want to purchase a house and they are not able to pay in cash. Let’s face it, who can pay cash for a house these days? In fact for decades people have looked to lenders to buy a house. And the problem is even greater today as house prices have soared. However there are different types of mortgage available and it can get quite complicated. This page explains some of the more common types of home loan.
What is a mortgage?
We hear and read about mortgages all over the media but how often do we stop and ask “What is a mortgage”?
Any lender will want some form of collateral which, if the borrower does not repay the loan, then the lender will have something they can claim instead of the repayment, i.e. the loan is secured against an asset. In the case of a mortgage, this is a loan where the collateral offered is the house that is bought with the money that has been lent.
Each mortgage lender will have their own conditions but in general, the house can be repossessed if the borrower fails to make the agreed regular payments.
Those regular payments will depend on the length of the mortgage or more simply, how many years the lender has agreed to lend the money. The lender makes their money from the interest payment that the borrower pays each month. The longer the loan, the more money they make. Usually there is a down payment or deposit that you have to make, although sometimes people can borrow 100% of the value of the house.
Types of mortgage loans
There are in fact many different types of finance for buying a house but there are two basic kinds of home loan which provide the majority of lending methods. They are the repayment type or the interest-only type. Each has various other names but they are the two main methods.
With the repayment method the borrower pays interest on the total outstanding loan plus a portion of the loan itself. The loan is also known as the principle or the capital. In the early months or years the amount of the loan paid off is very small.
The second method is the interest-only type which is exactly as it says, i.e. the borrower only pays the interest element. This means they have to find a way of paying the capital at the end of the agreed period.
Interest rate types
There are two forms of how the interest rate is applied. The first is known as a floating rate and the second is a fixed rate.
With the floating method, as the main interest rates in the economy are changed by the central bank, so the rate applied to a mortgage is changed.
With the second, again, it is exactly as it says. The interest rate is fixed for an agreed period. This may be from a few months to many years.
Advantages of fixed or floating rate mortgages
A fixed rate mortgage means that the borrower knows for certain how much they will be spending each month on their home loan. In the early years, especially for young home-owners, this can be a great benefit when their income is tight. There are no budgeting worries. However, if interest rates drop, then you cannot gain any benefit from this.
With a floating rate home loan, the monthly repayment figure is uncertain. If rates rise then so does your monthly cost. However, on the positive side, if rates decline you monthly payments will go down too.
Which type of mortgage is best?
It is impossible to say which is best as each borrower’s circumstances are different. The best option is to talk to a mortgage broker. They will be able to advise on various mortgage and home loan products currently available. The broker will explain the costs for each and how they affect your household income. So be sure to contact an experienced mortgage broker today to discuss different types of mortgages in West Auckland.
Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
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