Meandering Thru the Mortgage Maze – Part 2
Meandering Thru the Mortgage Maze – Part 2
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Home Page > Finance > Mortgage > Meandering Thru the Mortgage Maze – Part 2
Meandering Thru the Mortgage Maze – Part 2
Posted: Aug 13, 2008 |Comments: 0
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In Part 1 a general understanding of mortgages was explored. Part 2 investigates the many different types of mortgages which can generally be classified into two groups: changeable and static. Static allows you to budget more effectively as you know the figures that you will be dealing with each month. This raises the question of why so many people appeared to choose changeable and lose their homes as their rates zipped up.
It is difficult for many borrowers to resist the initial lower monthly repayments that are often offered on the changeable mortgages. This gives new home owners extra cash to repair and redecorate and sometimes an optimistic outlook can over-rule prudence. There are also genuine cases where a variable mortgage is advantageous; understanding mortgages can clarify these choices.
Mortgages have both similarities and differences; interestingly most of the similarities are favorable for the borrower.
-For instance you can usually move (called portering) a mortgage to a new property if you move house. This means that you will not have to pay a penalty for terminating the mortgage earlier than agreed.
-Another advantage is that often when you sell your house and do not want to keep the mortgage on it, the prospective buyer can ‘assume’ the balance of your mortgage; this can make it easier to sell.
-Renewal is automatic once you have been accepted into a mortgage scheme.
-You can usually pay off a lump sum every year on the anniversary of your mortgage date.
However, similarities aside, it is the differences between mortgages that are usually the deciding factors, and there is more variety of choice in the changeable or variable mortgages. These changeable mortgages come in several different forms, the most popular being:
Adjustable Rate Mortgages (ARMS) start at a low rate (perhaps it is a giveaway that this is called the teaser rate!) and moves up to a higher rate after an interim period, usually of six months. There are also steady and/or irregular increases, which make it difficult for the home owner to keep up. These increases are also difficult to estimate as they are calculated on a formula based on the Lender’s Index and Margin.
Two Step Mortgages lock the interest rate in for about seven to ten years; this later adjusts to a higher rate. This can be advantageous if you plan to stay in one place and know that your salary will increase drastically in the future i.e. if you are on an apprenticeship course).
Lender Buy Down is a similar idea, with the interest rate gradually increasing and can be practical for the same reasons as above. All the above mortgages start off with a lower monthly repayment which increases over time. Any of these mortgages could be subject to the whim of the financial markets and/or a Lender’s formula.
This means that they can change and if this means a big increase it could be insurmountable for the home owners. A mortgage broker can explain the positives or the negatives of a variable mortgage which will reflect your own particular set of circumstances.
One of the alternatives to the above choices and one which is easier to understand is a Fixed Rate Mortgage, sometimes called a ‘locked in rate’ mortgage which means that once the term has been agreed, your monthly payment will stay the same for the duration of the term or contract.
The contract can be for five years, or three or twenty or thirty. The interest rate will most likely be different for each term. A mortgage is usually amortized (completed) over a thirty year period, so you may have several terms in the life of your loan.
When you first start paying off a mortgage almost all of it is simply paying down the interest, but as the years pass, your monthly amount will start to pay off more of the principal and less of the interest.
This happens regardless of how many short or long terms you sign up for, as long as you are renewing each time with the same Lender. However, because of the high interest repayments in the beginning of a mortgage, it may be cheaper to rent if you plan on staying only two or three years in a new town.
With a mortgage that has a locked in interest rate, even though the rate at which you are paying down the balance of your property is changing, your monthly amount does not change because you have signed for a fixed rate of interest for a fixed time. This static payment can buy a large amount of peace of mind!
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