Finance

Mortgages explained

When it comes to mortgages, it looks like no one gets the same deal. Usually, in the early years, one will want lower repayments, the certainty of a fixed rate or a greater level of flexibility. This how-to explains some of the key elements to consider:

Basic ways to pay off your mortgage loan

Despite all the different types of mortgage packages and offers available, there are still only two basic ways to repay your mortgage:
1. Mortgage repayments (principal and interest)
2. Interest only mortgage

Repayments: pay everything back, including the interest

With this option, you are sure to pay your entire mortgage at the end of the term, provided that you do not miss any payments. The amount you repay each month is composed of principal and interest calculated to pay off your entire mortgage at the end of the mortgage loan term.

Interest only: you only reimburse the interest

This option means that your payment covers only the interests on your mortgage. You must ensure you have a way to repay the capital element of your mortgage before the end of the long-term mortgage – as an investment. Remember, however, to include the cost of your investment when you are figuring out what you can pay each month.

You can opt for repayment, interest only or a combination of both. But whichever option you choose, your mortgage must be reimbursed by the end of the term.

For most people it makes sense to organize a kind of insurance guaranteeing the loan payment to cover your payments if you were unable to work due to accident, illness or unemployment.

Types of mortgage

Fixed rate mortgages

US mortgage calculator with amortization table

US mortgage calculator with amortization table

The interest rate on your mortgage is fixed for a set period of time regardless of whether the lender’s base rate or standard variable rate changes.

Some mortgages have rates that change in the course of its term – and reimbursements payments rise and fall. This can make budgeting difficult, but with a fixed rate mortgage you know exactly what to expect. During your fixed rate loan you will not be affected by higher interest rates, this knowledge permits you to budget accordingly and easily.

On the other hand, if interest rates fall, you can miss a reduction in your monthly payments while you are on a fixed-rate mortgage. At the end of the fixed rate period, your interest rate may increases – or not – and adjust to a variable rate (usually a standard variable rate), but the bank may be able to offer another fixed rate at that time.

A repayment charge may apply if the mortgage is repaid faster during the loan period. It all depends on your mortgage contract.

You can find some US Mortgage Calculators here.

And some Canadian Mortgage Calculators here.

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