How to Choose the Right Mortgage for You
Choosing the right mortgage is possibly the biggest financial obligation most people make in their lifetime, so it’s imperative that you do your research before making your decision.
With an abundance of selections of mortgage options and an endless array of financial institutions offering their own programs, you can be left feeling overwhelmed.
Before starting the process, it’s best to familiarise yourself with the various mortgage programs available and what they all entail.
Mortgage Options
The first step is selecting how you would like to pay back the funds that you are interested in borrowing. The two primary choices include an interest only mortgage or a repayment mortgage.
Repayment Mortgage
A repayment mortgage is where the borrower would make a payment to the lender on a monthly basis. The payment includes interest on the money borrowed, as well as capital. This type of agreement gives the borrower protection that at the end of the commitment the full amount of funds that were loaned will have been paid off in its entirety.
Interest Only Mortgage
An interest only mortgage is a loan in which, for a designated period, the borrower makes payments only on the interest of the principle balance, with the balance still the same at the end of the term. At the end of the mortgage term, you still owe the lender the funds you were originally loaned and must decide whether you want to revamp the loan to a principal and interest commitment or pay off the principal on the mortgage loan. Having a reserve of money like a savings account or some type of nest egg will help ensure you have suitable funds to cover this type of loan.
After choosing the mortgage that best suits your needs, you need to consider what interest rate options you would like to work with.
Standard variable rate
Every lender has a standard variable rate (SVR) of interest on which it bases it mortgage transactions, which in turn is based on the Bank of England’s base rate of which it lends.
Fixed rate
A fixed rate mortgage (FRM) is where the rate of interest on the funds that are borrowed remains the same throughout the entire commitment of the loan and is perfect for the borrower who wants to feel secure knowing that your mortgage payments will be unchanged throughout this entire time. Fixed rate mortgages come in a variety of lengths from one to thirty years. The one drawback of this type of mortgage is that if the rates were to drop during this time, you would continue to pay at the rate that you originally agreed upon. To get a lower rate would mean you would have to refinance.
Discount Rate
A discount rate mortgage means the borrower gets a break off the standard variable rate from the mortgage lender for a specific length of time. As the rates of interest rise and fall, so will your monthly payments.
Capped Rate
The capped rate mortgage gives the borrower a promise that the interest rate that you are paying over a specific time will not exceed that capped interest rate. You also get the added benefits that if the interest rates do go down, so should your payments.
Flexible Deals
The flexible deals type of mortgage is perfect for borrowers who are self-employed; since the money they earn can vary. This type of commitment allows borrowers to make varying payments on their loans based on their present situation. This type of loan is not best suited for people with restricted funds or for first time purchasers.
So which mortgage commitment best suits your needs?
To make this determination, sit down with a financial advisor to review the broad spectrum of the mortgage industry and who will help you obtain the best deal for your needs.
Written by Andrew Potter, from My Online Estate Agent .
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