Before we proceed to explain the different types of mortgages loans, first, we have to define the meaning of Mortgage. According to Wikipedia, ” A Mortgage loan is a loan used by either a purchaser of real property to raise funds to buy real estate or alternatively by existing property owners to raise funds for any purpose while putting a lien on the property mortgaged”
From the above definition by an authority website, you will understand that a mortgage loan is a means of raising funds or borrowing money from another person/institution to carry out a project, while the borrower called the mortgagor gives his or her property as security to ensure that the full payment of the money borrowed will be made at the specified time. (a lien is a right the lender has over the property mortgaged. it gives the lender the right to sell the mortgagor’s property if he fails to meet up the payment as agreed).
When you consider taking a loan to purchase real property or carry out any project, you have to take into consideration many factors like the interest rate payable, the period within which you will pay the loan, and many others. In addition to these, you need to understand the different types of mortgages. This will give you a clear knowledge of how a mortgage loan is to be paid. By reading this post you will learn the best loan option to apply for whenever you get to any mortgage institution.
Type Of Mortgages Loans
The types of Mortgages may differ from country to country but there are basically 8 different types of mortgages. many countries set them up as options for a loan. To this, we have:
- Fixed-Rate Mortgage Loans
- Interest Only Rate Mortgage Loans
- Repayment Loan
- Variable Rate Mortgage
- Offset Mortgage Loan
- Standard Variable Mortgage
- Tracker Mortgage, and
- Discounted Rate Mortgage
Fixed-Rate Mortgage Loans
This is the type of mortgage that you will pay the same amount as agreed throughout the duration of the loan. Fixed Mortgage does not increase or decrease whether or not there is any change in the monetary policy of your country. It is meant to expire within the specified time. Both the lender and the borrower have to act within the agreement clause. Fixed load ranges from 5 years to 20 years depending on your agreement with the mortgagee.
Why people prefer this kind of mortgage loan is because they already know the amount they will pay once the loan is due, and they will have time to invest and re-invest the money on project.
Interest Only Mortgage Loan
This s a mortgage loan option where you are allowed to pay only the interest part of the loan for a period of time. Here you are not to pay the capital but the interest on the loan, and once the time for full payment reached, you will pay the capital, i.e the amount you borrowed from the mortgagee institution.
An interest-only mortgage is predicated on making payment of loans easier for the mortgagor. You pay bit by bit until the time for the capital payment comes. It is mostly used by those who do not want to feel the burden of having their load paid once, i.e the interest and the capital at the same time. Interest-only is a good option if you are starting a business new.
Repayment Mortgage Loan
A repayment mortgage is the type of mortgage loan where the mortgagor steadily, mostly monthly repays the interest together with the capital to the mortgagee. This is unlike the fixed and interest-only where you will pay the whole capital and the interest respectively. It is a recommended loan option for beginners because you bear the payment burden bit by bit, and as soon as you complete the payment you would have done with the loan agreement except where you decide to take another loan.
depending on the Mortgagor, you can pay weekly, monthly, quarterly, or yearly.
Variable Rate Mortgages
Variable mortgage loan is the direct opposite of fixed-rate mortgage in that the amount repayable can change with the changing factors. It may increase or decrease as the case may be. I personally do not like this kind of mortgages because it may go against me whenever the interest rate goes up.
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However, this doesn’t mean that people don’t take the loan option after all the interest rates may be favorable if the rate goes down.
Offset Rate Mortgages
An Offset type of mortgages occurs where the mortgagee and the mortgagor agree to reduct the payable interest from the mortgagor’s savings. The mortgagor usually links his account to the lender’s account. An Offset mortgage depending on the agreement may apply to other types of mortgages load except the fixed-rate.
Some lending institutions don’t always accept this kind of mortgage option because the mortgagor may decide not to save money in his bank account except for salary earners, and where there’s another means of repaying the loan.
Standard Variable Mortgage
This type of mortgage loan has some similarities with interest-only rate mortgage, the only difference is that in the former, the mortgagor charges you as long as your loan lasts or until you apply for other different types of mortgages. Like the variable rate mortgage, your interest rate may increase or decrease with the changing factors such as your countries’ monetary policy.
It may favor or work against you depending on the policy of your country.
Tracker Rate Mortgages Loan
Another kind of mortgage you can get is the tracker rate mortgages, it works hand in hand with the monetary policy of your country. For example, if your country initiates a policy that resulted in an increase in the interest, you will pay a higher interest at that particular time, and if the policy reduces the rate, you will pay a lesser amount. This only applies to your interest rate and not to the capital. The only thing is that your payment this month may not be the same with next month.
Discounted Rate Mortgage
This is another different types of mortgages loans where the mortgagee is at liberty to give you discount on the interest to be paid. In this loan option, your monthly or yearly payments may vary. As I said, the mortgagee is free to give you a discount. Some may promise to discount the interest rate but because they are in control, they end up not giving you any.
Note that the discount rate applies to the interest you are to pay and not the capital, Your load capital remains fixed throughout the period of the mortgage.
This is where I come to the conclusion of the types of mortgages that all the mortgage institutions can offer to its borrowers. In my next post, I will be talking about how to increase credit score.