It is extremely unlikely that a home can be purchased outright with cash alone. Most scenarios involve the deposit of a certain amount of funds alongside what is known as a mortgage. A mortgage is simply another term for a loan that is taken out against a home. The home itself is used as collateral. Should payments not be made on time or if the borrower defaults, the lender may repossess the home as a means of remunerating lost funds. A mortgage can be broken down into two categories: those whose rates are fixed and scenarios when interest may fluctuate (or float) over the duration of the loan. The primary advantage with any mortgage is the ability for the buyer to secure a home with only a fraction of its initial cost.
Types of Mortgages
A fixed-rate mortgage is a scheme whereas the amount of interest paid monthly does not change throughout the lifetime of the loan. The primary advantage here is that each payment can be easily predicted; ideal for those who need to carefully plan their budget. However, the downfall with a fixed-rate mortgage is that if predominant interest rates fall, the borrower will still be required to pay a higher level.
Adjustable mortgages are defined as those which contain fluctuating interest rates. While there can be times that this is beneficial (as in the example above), the opposite also holds true. Higher interest rates can contribute to substantial premiums that need to be paid. Thus, the total amount that is owed can be predicted, but not calculated to an exact figure.
Things to Take Into Consideration
The choice of a fixed-rate or a variable-rate mortgage has a great deal to do with predicted interest rates into the future. As most mortgages will last for two decades or longer, this can be challenging to determine. So, it is advisable to speak to a lender; they will normally be able to provide relatively accurate rates (although not with complete certainty). Another consideration is the amount that will need to be borrowed. Depending upon the down payment, this figure can be quite high. Therefore, the borrower will need to be sure that he or she can afford future payments to avoid default or a possible foreclosure.
How to Get the Best Deal
Different lenders will offer disparate interest rates. So it is wise to examine the predominant rates to see which institution provides the most amenable figures. Other factors are:
- The use of a mortgage calculator.
- The reputation of the lender.
- The levels of customer service.
A mortgage can be a wonderful investment and with the proper research, the best package can be chosen.