If you are considering getting out from under the thumb of a home rental agreement and get set on the path toward home ownership, you’ve likely heard that there are different types of mortgages that are available to you. All mortgages carry with them a principal, which is the amount initially borrowed, as well as an interest rate that must be paid as a part of your monthly mortgage payments.
While this is true of all mortgages, not every mortgage option operates in the same way. There are different kinds of mortgages, like conventional, private, second mortgages, and many more. All of them can reduce or increase the amount of interest that you will end up paying over the duration of your mortgage’s term. Continue reading to learn what the differences are between mortgage types. From here, you will be one step closer to determining which mortgage arrangement is right for you.
A conventional mortgage entails the buyer to put a down payment of at least 20% of the home’s total value. This is because conventional mortgages will only offer amounts up to 80% of the home’s value. Those who pay 20% or more for their down payment will be rewarded with lower interest payments, making it easier to pay off their mortgage in full more quickly.
If you don’t have 20% to put toward a down payment on a home, a high ratio mortgage can bridge the gap between you and your first home. This kind of mortgage allows for down payments as low as 5%, but in exchange require that the borrower also buy mortgage insurance. Mortgage insurance is a necessity in these mortgage loans, as the borrowers in these arrangements are considered fairly risky to work with. This insurance protects the lender if the borrower were to default on their mortgage payments.
If a homeowner has decided that, two years into their five-year mortgage contract, they want to sell their house they could enter into an assumable mortgage arrangement with a buyer. This is especially common when interest rates are at their highest. For instance, if the original home buyer were to get a mortgage at 7% interest and then decide to sell in a market that has increased interest rates to 11%, the new buyer could assume the mortgage at its lower interest rate for the duration of its original term. Once the original term has ended, the new buyer will then be on the hook for renewing the mortgage at the rate dictated by the market.
When interest rates in the market drop, homeowners will see more of their monthly payments going to their principal rather than their interest – that is, if they have a variable rate mortgage. Variable rate mortgages are subject to change in response to rising or declining interest rates, which will reflect how much you pay and how much of each payment is actually applied to the principal of the mortgage loan. If you feel certain that interest rates in the market are going to decline, a variable rate mortgage could be exactly what you’re looking for.
Unlike variable rate mortgages, a fixed rate mortgage’s interest rates do not change at all during the term of the mortgage. This is an ideal mortgage to enter into if you are certain that the market’s interest rates will only go up.
When you know what kinds of mortgages are available to you, as a home buyer you can make the most informed and practical decision for your unique situation.