Different Types of Mortgage Loans: Part II

Fixed-Rate Mortgages v. Adjustable-Rate Mortgages

Fixed-Rate Mortgages

For the borrower with a fixed-rate mortgage, the interest rate for monthly payments remains the same despite market changes. Sometimes homeowners obtain mortgages with a fixed-rate for the first few years, which then might change to an adjustable-rate thereafter.

Having a fixed rate is great for planning your budget because your mortgage payment will be exactly the same each month. There certainly is something to be said for stability, especially if market rates are higher than your fixed rate. On the other hand, however, if market rates fall, then you will not benefit as your rate remains the same.

Balloon Loans

One sub-type of a fixed-rate mortgage is a balloon loan. Such loans utilize a fixed-rate, but the monthly payments are not set up, in and of themselves, to pay off the loan within the mortgage term. Instead, monthly payments will be less than they would be otherwise, while the final payment due will be much larger than the others to pay off what remains of the principal.

Adjustable-Rate Mortgages

Adjustable-rate mortgages, also known as “variable” mortgages, do not have set interest rates as is the case with their fixed-rate counterparts. Instead, the rates of these mortgages fluctuate as market rates fluctuate.

Such loans make it difficult to plan a budget because monthly payments always will be changing. However, just as easily as your variable rate can be above a fixed-interest rate, it also can fall below and save you money.

Whether or not an adjustable-rate mortgage is a good investment really depends upon luck and if you are a risk-taker. If you know that you will not be able to afford payments if your interest rate rises, then you should not get an adjustable-rate mortgage. However, taking a chance on an adjustable rate does work out for some people, and you always can refinance your variable-rate mortgage if you wish.

Common sub-types of adjustable-rate mortgages include:

Capped Rate Mortgages

Capped rate mortgages work the same way as traditional adjustable-rate mortgages, but instead of the rate being able to rise to extreme highs, there is “cap” that your rate must stay under. This certainly can help you to plan your budget and to make variable rates less “risky” in comparison to fixed rates.

However, the capped rate almost certainly will be higher than a comparable fixed rate, so you still could end up paying more if your rate stays at the cap for a long time. Of course, you also could save money if market rates are low.

Discounted Rate Mortgages

Interest rates are based on the market rate just as they would be with a traditional adjustable-rate mortgage, but these mortgages offer a discount on that rate for a certain period of time at the beginning of the mortgage term.

This discount could not come at a better time for the new homeowner with moving expenses. Most discounted rate mortgages also release the discount gradually so that you all of a sudden are not inundated with a large increase in payments.

This type of mortgage can work out very well, but remember that even with the discount, your payments will rise if market rates rise.


Cashback Mortgages

Upon obtaining a cashback mortgage, you will be given a lump sum of money that is based on a percentage of the amount of your loan. Similar to the discounted rate mortgage, this provides you with cash at time when you really could use it. However, usually the money is granted after your deposit, so do not count on using your cashback for this purpose.

Aside from this original lump sum, your mortgage will act as a traditional adjustable-rate mortgage.

Tracker Mortgages

A tracker mortgage is very similar to an adjustable-rate mortgage expect that instead of one’s rates being based directly on market rates, they are based on some independent rate that is linked to the market rate. Aside from this, they act like variable-rate mortgages and have the same pros and cons as well.

Conclusion

This article has scratched only the surface of the wide variety of mortgages available to homeowners. For more information, please visit the DebtHelp Mortgage Guide and speak with a trusted mortgage broker.

Go to Part I of this article.