A mortgage is a loan that is taken out so that an individual is able to buy a house. There are a wide variety of mortgage options, and this simple fact is just about all that they have in common! If you are in the market to purchase a home, then it is crucial that you fully explore your loan choices, because there sure a lot from which to choose.
Mortgages may be categorized several different ways. They may be either (1) government loans or conventional loans, (2) repayment mortgages or interest-only mortgages, or (3) fixed-rate mortgages or adjustable-rate mortgages. Beyond this, there are several sub-types associated with the latter distinction.
Government Loans v. Conventional Loans
Mortgages may be identified by the source of their funding. Government loans are mortgages that are provided by the Federal Housing Administration (FHA), Veterans Affairs (VA), or the Rural Housing Service (RHS).
Mortgages that are provided by any other lender, on the other hand, are considered to be conventional loans.
Repayment Mortgages v. Interest-Only Mortgages
Debt associated with mortgages can be split into two different parts: capital debt, or the amount of money that you actually borrowed, and interest. Repayment mortgages and interest-only mortgages differ in how they deal with both of these parts.
With a repayment mortgage, the borrower makes monthly payments that are used to pay off both a bit of interest as well as a bit of capital debt. Generally, the majority of payments are used to pay interest in the first few years of the loan, but this balance changes gradually until a large percentage of payments goes to one’s actual debt.
Sticking to the payment plan of a repayment mortgage guarantees that you will be debt-free at the end of your mortgage term, and that you will own your home free and clear. However, because this plan requires that you pay off both parts of the debt simultaneously, your monthly payments will be higher than they would be if you had an interest-only mortgage.
If you choose an interest-only mortgage, then the monthly payments that you make to your creditor will go entirely toward paying off your interest. Consequently, your payments will be less than they would be with a repayment mortgage, but this perk only exists in the short-term.
In addition to interest payments to the lender, borrowers also should be making monthly payments into a separate fund. This is because, at the end of your mortgage term, the entire balance of your capital debt will become due. If you are unable to pay at this time, then your lender can take possession of your property.
Interest-only mortgages can be a good option for borrowers who do not have very much money upon first obtaining their homes, but who expect to have more funds in the future. However, may mortgage providers nowadays do not require proof that you have an investment fund separate from your monthly payments, so this option can be dangerous unless you can reliably and responsibly plan for paying off your capital debt.
Objectively speaking, repayment mortgages generally are better investments if you can afford the higher payments right away. In addition to being riskier, interest-only mortgages also will cost you more in interest in the long-run, because you are borrowing the total sum of your loan for your entire mortgage term.
Go to Part II of this article.
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