Learn of the different types of mortgages that banks offer to their customers today including buy to let, commercial, refinance and more.
We live in a world and age dominated by rich people and big corporations. Regular people and employees can’t afford to purchase a new house or property with cash, so they more than often go to banks and lenders for a mortgage. The mortgage, which is a loan to finance your purchase, has become one of the most beneficial tools for couples who want to move into a new home or for singles who want to relocate.
The Different Types of Mortgages
There are various types of mortgages that banks offer to their customers. The main types include buy-to-let, commercial, fixed rate, home, refinance, residential, second and subprime detailed as follows:
Buy to Let Mortgage Loans
A buy to let mortgage is the process of buying or constructing a property with bank funds in order to rent it out. The rental payments collected from the tenant are used for repayment of the mortgage. Nowadays, many banks and societies are offering this type of mortgage loan to the buyer.
There are certain eligibility requirements above those for a regular mortgage for the buyer who wants a buy to let mortgage. With this type of arrangement, an individual would pay a higher interest rate as it is business to rent the property. The buyer has greater risk when compared to the traditional method. If for instance the house is not occupied by a tenant for a considerable period of time, the buyer may have difficulty repaying the mortgage and so may default in his repayment. The mortgagee also needs a bigger input of funds toward the purchase when compared to the standard mortgage method.
A buy to let mortgage can be a risky business but on the other hand can be profitable. If everything goes well however, it is a great way of paying off a house mortgage.
Commercial Mortgage
A commercial mortgage refers to a loan that is issued for the purpose of purchasing a commercial land or building and not a residential one. In other terms, it means that the loan is secured on property that is not your residence.
In commercial mortgages, lenders usually hold the property you are intending to buy as the security for the loan which translates to around 70% of the value of your property. On top of this, you are required to give cash deposit for the balance of the buying price. In case you don’t have the cash, you are provided with the option of offering the lender additional security which could be any other property you have a considerable equity in.
Unlike personal loans, there are no set rates for commercial mortgages. Instead, the lending manager carefully goes through the loan applications and assesses the risk level involved in giving out the loans. This enables the manager to set the rate according to the risk level involved. In generally, larger loans that have low risk levels attract the best rates.
Fixed Rate Mortgage Types
When searching for a home mortgage, you will find many options available to you. But the most popular option is called fixed-rate mortgage. This is because of the several benefits it has over others.
A fixed rate mortgage is described as a fully amortizing mortgage loan whereby the interest rate remains the same throughout the term of the loan. This is opposed to loans whereby the interest rate might adjust or “float”. With this kind of loan, the homeowner may make same payments every month till the mortgage is fully settled. But the predictability may come with higher closing costs. While there are some limitations, getting a fixed rate loan may make sense for buyers.
Every payment of the month is equal to the interest rate times principal and a small percentage of principal itself. Because some bit of the principal is settled each month, this makes interest payment on remaining principal to be also a little less monthly. In the initial stages of the loan, majority of the payment will go towards interest. On the other hand, most of it will go towards principal when the loan is at the end.
Understanding fixed-rate mortgages
When majority of individuals think of fixed-rate mortgage, they envisage one in which the rate is the same each day for the period of the mortgage. Note: One trick which has been used on several unwary home buyers is for a broker to indicate a mortgage is fixed-rate for 30 years while in actuality, it’s a 30-year mortgage whereby the rate is only fixed for a few years.
Types of fixed-rate mortgages
There are 5-year fixed rate mortgage, 15-year fixed rate mortgage, and 30-year fixed rate mortgage.
Whereas it’s the most popular choice, a fixed-rate might be better for a number of homeowners than others. Basically, while the rates are low, the mortgage is best for homeowners who are planning to stay in the same home for a number of years, or are refinancing and are planning to continue living in the home.
Advantages
Fixed-rate mortgages provide the following benefits:
- Payment predictability – Your mortgage payment is going to remain the same (though payment fluctuation to your provider might change).
- Ease of settling principal – The majority of fixed-rate mortgages don’t come with extremely restrictive penalties. Therefore, you can make extra payments towards principal without costs.
- Stable interest rates – When the mortgage market worsens significantly, you do not have to be worried paying additional interest. And when it gets better, you may refinance in order to receive better rate.
Disadvantages
The limitation is that the interest for fixed-rate mortgage is higher when compared to interest only loan or adjustable rate. This inevitably makes it more expensive when interest rates drop, or remain the same. Furthermore, you may receive equity slower when compared with an adjustable rate loan. This is due to the fact that payments over the first few years basically go toward interest. Thus, they are not ideal loans when you plan on selling your house within 5-10 years.
Home Mortgages
For you to understand the idea of a new home mortgage, you must first have a look at the variety of home mortgages available. You will actually distinguish two types of home mortgages, the adjustable rate mortgage and also the fix rate ones that have the same interest rate set for the entire loan duration.
For instance, if you happen to get 5% interest rate on your home mortgage, then you must be sure that this percentage will be set till you decide to refinance your home mortgage loan. It could be beneficial for those buyers who are usually not on a budget and wouldn’t like to get surprises of some sort.
For the adjustable rate home mortgage, it may come with much lower interest rate offer once you wish to buy a new home. This particular situation works well for those who don’t plan to be in the new house for a number of years.
Your ability to qualify for these loans is the main factor that influences the kind of new home mortgage loan to get.
Refinance Mortgage
Refinancing a mortgage is an option available to borrowers to begin a new mortgage to replace their original mortgage from the bank. Reasons for refinancing mortgages may include lowering interest terms and rates, converting variable loan rates to fixed ones, and decreasing the cost of monthly payments.
The first and most important factor in refinancing is to develop a means for repaying the mortgage. Because your mortgage is a loan, the bank or lender is interested in how the loan will be repaid. Whether you are investing in something to increase its dollar value or spending the money to fund an investment (e.g.: an education, a new car, etc.), it is your job to determine and delineate exactly how the money will be paid back to the lender.
Once you have established your position, to refinance your mortgage you must communicate with the bank or lender as to the options available. At times, refinancing is not an immediate option. Discuss the possibilities, timing, and potential lenders with your financial advisors and current lender to determine the opportunity that will best fit your financial circumstance and timeline.
Refinancing a mortgage will include certain costs that you must consider including application fees, title insurance and title searches, attorney review fees, and loan origination points and fees.
More on different Mortgage Loans
Residential Mortgage
Thee are home loans that people can apply for to buy or build residential properties. The loan is specifically used to acquire a property in which one will live.
The borrower will have to repay it over a specified period of time as per the agreement on the terms and conditions of the loan. This is why it is necessary for you to take time and read the terms and conditions before applying for a mortgage loan.
When repaying residential mortgage loan you will have to pay interest. This makes it necessary for you to factor the interest rates while applying for the loan. Most residential mortgages interests are tax deductible. There are many lenders who will be ready to offer you the loan. You should however weigh your financial capabilities and the costs involved before you decide on a particular lender.
Second Mortgage
A second mortgage allows homeowners to access the equity, or finance, in their homes. Taking out a second mortgage means taking out another loan in addition to the original mortgage. This second loan uses the house as collateral.
The equity that can be released, or the money borrowed, through a second mortgage is equal to the difference between the original value of the house and the amount outstanding on the initial mortgage. There are many reasons homeowners choose to take out second mortgages, ranging from consolidating debt to financing household improvements. The interest rate on these mortgages are usually higher, and the second mortgage is typically secured with the same assets that were used in the first.
When a second mortgage is implemented, the bank or lender files a lien, or legal action, against the home involved. This lien allows the lender to ultimately take possession of the home, should the owner default on the mortgage payments, though they remain second in like to receive compensation after the original mortgage lender. When carefully considered, second mortgages can provide a viable method of releasing the equity in a home.
Subprime Mortgage
A subprime mortgage is a type of loan that is given to people with bad credit history and cannot benefit from conventional mortgages offered by banks and other money lending institutions.
The rates of the subprime mortgages are above the prime lending rates since the lender perceives the borrower as a risk; he/she may default from paying the loan. The high-interest rate serves as compensation to the lender for accepting the risk to lend the money to borrowers with impaired credit records. Normally, the subprime mortgage borrowers have a FICO score of less than 600.
Other than high rates, these types of loans are also characterized with unfavorable and unfriendly terms meant to compensate for higher credit risk involved, and also they have poor quality collateral. The adjustable rate mortgage is one of the structures of these types of loan. This kind of mortgage charges a fixed mortgage rate and then converts to a floating rate. The conversion is based on an index such as LIBOR.
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