Are you buying a house and confused about different mortgage options? If yes, read on! As soon as you start searching for a mortgage, you get multiple options to choose from. There are many types of mortgages available to the home buyers and the selection of one can be quite overwhelming. Even though all the mortgage types work in the same basic way i.e. you borrow money and purchase the desired property and pay back the money along with interest, you cannot make the right choice unless you are aware of all the mortgage types.
To help you make the right choice and get a good start for your home buying process, let us talk about different mortgage types!
Fixed Rate Mortgage
In this type, the interest rate remains the same throughout the mortgage period. That is, once the rate is fixed and applied to your loan amount, it doesn’t change later on. This mortgage type gives the home buyer a peace of mind as monthly payments remain the same and help the buyer to budget accordingly.
However, the interest rate in fixed mortgage type is slightly higher than other mortgage types. Also, when interest rates fall, the buyer will not benefit.
Variable Rate Mortgage
This mortgage type is the opposite of a fixed mortgage rate. The interest rate can be changed at any time throughout the length of the deal. In other words, if you are opting for a variable mortgage rate you must set aside some savings so that you can manage the increase in mortgage payments, in case if rates rise.
Variable mortgage rate usually comes in two forms;
- Standard Variable Rate – SVR
- Discount Mortgages
In standard mortgage rate, lender charges the normal interest rate to home buyers that last throughout the mortgage and until the home buyer goes for another mortgage. A discount mortgage rate is the discount off the lender’s SVR and applies for a particular time period, usually 2 to 3 years.
Tracker mortgage works directly in line with some other interest rate, usually a central bank’s base rate and a few percent more. Thus, if the base rate increases by 0.5%, your rate will also go up accordingly and with the same amount.
This type of mortgage has a short life. Usually, they last for 2 – 5 years. However, some lenders provide trackers that may last for the entire life of your mortgage or unless you take another deal. The greatest advantage of the tracker mortgage is that if the tracked rate falls, the payment of the mortgage amount also reduces.
Capped Rate Mortgage
This rate works in line with the SVR of the lender. But as the name suggests, cap rate cannot rise above a particular level. Even though the rate won’t rise above a particular level, but a home buyer must remain prepared to make the payments when the rate increases up to the level of the cap.
All of these are just some of the mortgage types. When you compare different mortgage types, it is better to consult with professionals to make the right choice.
To get more valuable insight, continue to read our blog.