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Learn About Mortgages
What are the types of mortgages?
There are several types of mortgage available, so before you choose one – or decide that you can’t get one – consider these options.
What is a fixed-rate mortgage?
A fixed rate mortgage is one for which the interest rate does not change for a fixed period. It is usually set a little higher at the onset than a variable rate mortgage, but it will not go up if Bank of England interest rates rise. This means that it will not become more expensive, and not will your monthly payments go up – at least for the fixed rate period. Likewise, however, if the bank of England rates fall, you will not see a change in your cost or payments.
Terms are usually 10, 20 or 30 years long. Longer terms mean lower monthly costs, but higher costs over all, as interest will be paid over a longer period.
What is an adjustable-rate mortgage?
Adjustable rate mortgages (also called variable rate mortgages or tracker mortgages) usually offer lower down payments, and the initial interest rate may be a bit lower than that of a fixed rate deal, but there are obvious risks.
If Bank of England rates drop, the loan becomes less expensive and monthly payments will decrease. This is, obviously, not a problem. If the Bank of England rates rise, however, then the cost of the loan increases and the payments get bigger. That’s the risk.
If you have the capital to weather an unfortunate rise in the base rates, but think that rates will decrease over the duration of your mortgage period, then you are in a good position to take on an adjustable rate loan.
Rates change based on the agreement you have with the lender. Rates can be adjusted each year (usually these offer the best rates) or according to a different arrangement, including a hybrid of fixed and adjustable rates, in which the rate may be fixed for the first five year period, then adjustable annually after that.
What is an FHA loan?
Federal Housing Administration (FHA) loans are backed by the government. Because lender risk is lower, smaller down payments are demanded and a higher debt to value ratio is acceptable to the lender. You may be able to qualify for as little as 3.5% down, but this usually requires mortgage insurance as a means of reducing the risk further.
What is an VA loan?
The Department of Veterans Affairs (VA) is a special form of government backed loan available to veterans of the armed services (active-duty members, veterans, guard members, reservists, and certain spouses may qualify). These loans may require an initial fee, but may result in a loan requiring little or no down payment.
What are interest-only mortgages?
An interest-only mortgage is a type of variable rate mortgage that allows for an initial period of no interest. This keeps payments as low as possible for a time, allowing the borrower to build up some stability prior to an increase in monthly expenses.
The increase in monthly payment once this period is over, however, can be significant.
What are balloon mortgages?
Balloon mortgages offer low, fixed interest rates for a short term, then the remainder of the loan is due in full. This type of arrangement is usually used as a bridging loan for developers, or those expecting an alternate means of credit or payment to become available before the loan is due.