A home mortgage is something every person will encounter atleast once in their lifetime. Therefore, everyone must know what this is and how mortgages work.
What is a mortgage?
In its most basic form, a mortgage is a type of loan where you use your property as a security for the loan. A mortgage is used to fiancé an investment property or your home so that you can easily purchase these without paying the entire amount upfront. You borrow a principal amount similar to a loan and pay it back with an interest over a set time duration.
Until you pay off the entire thing, the lender will own your property. The title will have the lender’s name.
Similar to normal loans, a mortgage repayment has both the principle and interest components. The principal to the basic amount that is borrowed from the lender while the interest the cost of borrowing that principle amount of money.
There are two main types of home loans or mortgages you can choose from. You can either pick a fixed rate or a variable rate mortgage.
Variable vs Fixed Rate Mortgage
Below are the two main types of mortgages.
Variable Rate Mortgage
As the name suggests in a variable rate mortgage, you can vary the interest rate over the duration of the loan. The repayment will increase when the rate goes up and vice versa.
So, by using this type of loan there is potential for some savings when the interest rate goes down. Compared to fixed rate mortgages, this type of loan offers flexibilityHaving flexibility with a mortgage allows your two access additional benefits like a redraw facility or the ability to make extra payments and shorten the duration of your loan.
However, the downside to this type of mortgage is the high interest rates. So therefore, it is hard to budget your repayments.
Fixed Rate Mortgage
As the name suggests, a fixed rate mortgage is where the rate of the loan is fixed over the set duration of the loan. This duration is between 1 to 5 years. One of the main advantages of this type of loan is that no matter how the lenders rates fluctuate you will not be affected. You’ll have to make the same repayment amount.
If you want to budget your repayments properly then this type of loan is the ideal choice. If you are a first-time home buyer then you might want to go with a fixed rate mortgage. If you are an investor who wants to ensure a positive cash flow, then a fixed rate mortgage.
A fixed rate mortgage also has fast loan approval rate.
How long is a mortgage for?
The duration of your mortgage or how long you take to pay it off will determine your repayment amount and the overall amount at the end of the loan.
A longer loan duration means you will have a low repayment amount but in the long run you will be paying more. If you pick a shorter term, then you will have to pay a high monthly payment, but the total of your loan will be significantly lower.
This a basic guide as to what a home mortgage or loan is. The different features and benefits will depend on the lender.