Know the different Types of Mortgage Loan and pick the right option!

What is Mortgage?

Mortgage is a lending system in which the financial institution lends an amount to a borrower taking the asset, in this case, the house, as the collateral. The mortgage is the easiest way to pool funds for buying a house. However, it is hard when it comes to picking the right mortgage option. The simple way to rightly pick the favorable option is to either approach a mortgage broker or understand the types and choose the right option. The classification is based on the interest rates, repayment methods, repayment term, and mortgages for special situations.

Types of Mortgage Loans:

There are almost 13 different types of mortgage loans. Without giving room for unnecessary detailing, we have reduced mortgage loans into 7 different loans. Understanding these 7 types is more than enough to pick the right type. The following are the types of mortgage loans:

Repayment mortgages:

It is the basic method of repaying all mortgages. They seem a little similar to interest-only loans but they are different. Here the borrower has to pay a fixed amount every month during the whole repayment term. If the repayment period is 25 years the total amount payable, that is principal plus interest, is spread over the loan term, and the amount is paid on a monthly basis. So by the end of 25 years, you would have paid the amount, ready to own the house all for yourself.

Interest-only mortgages:

In interest-only loans, the borrower is asked to pay only the interest during the loan term, and the total amount is repaid at the end of the loan term in a lump sum. This type of loan is preferable to the ones who prefer lowest monthly payment over the loan term.

Rate-based types:

Under rate-based mortgages, there are two types: Fixed-rate mortgage and Variable-rate mortgage. Under Fixed rate mortgage the mortgage rate is fixed for a specific period say 3 years or 5 years. But after that the rate increases. You can switch to a different scheme, but that is going to cost some additional money. In variable rate mortgage, the interest rate goes up and down depending on the mortgage rate. Here the borrower is unaware of his periodical payments.

Tracker mortgages:

Tracker mortgage is just another variant of the rate-based mortgage. They move in line with the interest rate. When the base rate goes up, the mortgage rate also goes up, and when the base rate goes down, it leaves the same impact on mortgage rates too. This type of mortgage is best suited for buyers who can afford to pay high rates and trust that the rates will go down in future.

Buy-to-let mortgages:

One need not have to explain what buy-to-let out a mortgage is. Here the borrower gets the loan to buy a house and rent it out. The amount you borrow is based on the amount you earn or expected to earn through let out. However, this may not be applicable for first-time buyers.

First-time buyer mortgages:

A first-time buyer can choose any type of mortgage that he finds comfortable. However, mortgage markets are highly complicated, so a first-time buyer has to analyze the consequences and choose accordingly.

Flexible mortgages:

A flexible mortgage is a variant of the repayment mortgage. The repayment amount can fluctuate based on your payment capacity in a much. It in a month you can afford to pay more you can pay more than a month and if you go through a difficult patch you can lower the repayment amount. The former clause is applicable for most types, but the latter is available only on flexible mortgages.