Category: Accounting

The house buyer has many different types of mortgages at his fingertips, and as well as different mortgage items, there are various ways of measuring and repaying interest on the mortgage. Deciding which mortgage best suits the specific financial circumstances of a home buyer can be very complicated and difficult to produce. The form of mortgage that will be most appropriate will also depend on the future plans for the property of the house buyer; if they intend to sell within a short period of time, if they intend to rent out the property (most regular mortgages do not allow the house owner to rent the property and therefore require a different mortgage for landlords). Island Coast Mortgage

Many people decide to take out a fixed rate mortgage so that the interest rate for the entire length of the mortgage term is set at a certain percentage of the loan. It means that the lender knows exactly what it has to pay each month and that budgeting for the mortgage repayments is much simpler. Therefore, this type of mortgage is the most common for this purpose and around 75 percent of all mortgages taken out are mortgages of a fixed rate type. The mortgage term may be 10 years, 15 years, or even 30 years. The benefit of this type of loan is that the borrower knows exactly what he or she is expected to repay for the set time frame every month. The downside is that these types of mortgages typically have a higher interest rate than other mortgage products, and because the interest rate is fixed for a set number of years, if the interest rate decreases in that period, the borrower is stuck making higher payments than other mortgage products might have.

An Adjustable Rate Mortgage or ARM normally has a set amount of time at the beginning of the loan (usually one or two years) when the interest rate is fixed and often lower than the current market interest rate. However, after this time the interest rate will adjust with the market rate and thus the repayments will be higher after the initial introductory period. With an adjustable rate mortgage of one year, the interest rate increases after the initial fixed rate period each year. This form of mortgage carries a lot of risk as the borrower does not know from year to year what the interest rate is going to be and therefore what its monthly repayments are going to be. This makes it much harder to budge for mortgage repayments. Because this form of mortgage carries an additional risk, the borrower can typically borrow more money and thus afford a house which is more costly. Caps are often set so that the interest rate can not go up or down beyond certain thresholds. There are also adjustable mortgages at three and five-year rates.

A two-step mortgage could be a better option for those who consider reselling or refinancing within a short time frame. That form of mortgage has a fixed interest rate for the initial loan process and then another interest rate for the remainder of the lending duration. Current market rates would dictate the interest owed, so the home buyer risks the interest rate that after the initial fixed period. But if the borrowing is planning to sell the property before this modification date then this could be a good option to obtain a low interest rate mortgage.

Home buyers can also opt to go for a mortgage interest only by paying the interest on the loan only every month. During the lending term the principal amount of the loan is not paid back at all and so when the mortgage ends the borrower still owes the entire amount of the loan. This has the benefit of lower monthly repayments, but at the end of the mortgage term, the borrower will find a way to repay the original amount of the loan, usually by means of some investment product such as life insurance or an endowment fund. However, if the investment product has not performed well or the entire market has declined, the investor may not obtain sufficient funds from the investment vehicle to repay the loan. This was the case in the 1980s and 1990s, with many peep mis-sold endowment policies. Normally lenders are given the option of having an interest only mortgage plan for a set period at the beginning of the loan but then after that point the home owner has to start paying back both the principal loan and the interest and so the repayments will rise steeply. A form of mortgage typically has a higher interest rate than a regular repayment mortgage due to the interest only period at the beginning.