Different Types of Mortgages
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Remember: Knowledge will get you that loan.

When it comes to mortgage loan, there are only three types as follows:

Fixed-Rate Mortgage

fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and therefore less popular than shorter term fixed rates. 

For greater flexibility, you have a choice of different amortization periods and terms.

WHAT’S IN IT FOR YOU (Example only – different financial institutions have different terms and features)

* The down payment has to be at least 25% of the purchase price. 
* The rate does not vary during the chosen term. 
* You can choose from the following terms: 
* Open term: 6 months, 1 year 
* Closed term: 3 months, 6 months, 1 year, 2 years, 3 years, 4 years, 5 years, 7 years, 10 years.

Variable-Rate Mortgages

In a Variable-Rate Mortgage, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime Rate, the LIBOR, and the Treasury Index (“T-Bill”). Other indexes like 11th District Cost of Funds Index, COSI, and MTA, are also available but are less popular.

Variable-rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM’s note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.

In most scenarios, the savings from a Variable-Rate Mortgage outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

Interest-Only Mortgages and Loans

At the end of the term the borrower may renew the interest-only mortgage, repay the capital, or (with some lenders) convert the loan to a principal and interest payment loan at his option. It should be noted that some interest-only mortgages in Canada allow the borrower to pay interest-only, principal and interest, or even principal and interest plus 20% extra.

In the United States, a five or ten year interest-only mortgage period is typical. After this time, the principal balance is amortized for the remaining term. In other words, if a borrower had a thirty year mortgage and the first ten years were interest only, at the end of the first ten years, the principal balance would be amortized for the remaining period of twenty years.

The practical result is that the early repayments (in the interest-only period) are substantially lower than the later repayments. This enables a borrower who expects to increase their salary substantially over the course of the loan to borrow more than they would have otherwise been able to afford. Interest-only mortgages were popular in the 1920s. Due to the economic downturn and lack of work for the average person, there were many foreclosures during the Great Depression of the 1930s.


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