Mortgage Comparison: Different Types of Mortgages
When most people think of a mortgage, they think of a simple home equity mortgage. This is perhaps the most common type of mortgage, but there are many other types of mortgages available. In fact, a mortgage loan is simply defined as a loan for real property, wherein the borrower agrees to give back the property if he doesn’t meet his obligations under the mortgage. This broad definition allows for many different types of mortgages.
In many places, such as the UK, borrowers seeking to purchase a home typically do so through a mortgage rather than a large cash payment or trade-in-kind. The principle advantage of a mortgage, from the perspective of the borrower, is that mortgage loans are typically much less expensive than other types of loans. From the advantage of the bank, the principle advantage of a mortgage is that the loan is secured by the property, meaning the bank can reclaim the property if the loan goes unpaid.
Prospective homebuyers should make a careful mortgage comparison to identify the type of mortgage that best suits their needs.
Fixed Rate Mortgage
A fixed rate mortgage offers predictability; this is its principle advantage as well as its principle disadvantage. The payment offered on a fixed rate mortgage never varies, meaning that both the borrower and the bank can count on the same payment each month. A homeowner using a fixed rate mortgage can budget more easily, and doesn’t need to worry that rising interest rates will result in unaffordable payments. The bank, on the other hand, doesn’t have to worry about a sudden drop in its income as a result of plunging interest rates.
Homeowners should remember that they aren’t truly locked into a fixed rate mortgage. That’s because it’s almost always possible to remortgage a home, though banks often charge the homeowner a penalty for exiting a mortgage.
Variable Mortgage – Tracker Mortgage
A “tracker mortgage” is a type of variable mortgage rate mortgage that requires the borrower to pay a changing interest rate. Usually, this rate is tied to the interest rate charged by the Bank of England. Usually, the bank requires the borrower to pay the rate offered by the Bank of England plus another portion of interest, called the “base.” Often the base is .5 percent, meaning that if the Bank of England offers rates at 3 percent, the borrower must pay 3.5 percent interest on the mortgage.
When a borrower takes out a tracker mortgage, he is betting that interest rates won’t rise and make his home unaffordable. This risk is real: though homeowners caught in a tracker mortgage can, of course, remortgage their homes if interest rates rise, the new mortgage rate is likely to reflect the state of the market–leaving the homeowner in an equally poor position. For example, if interest rates rose dramatically to 8 percent, a homeowner could refinance, but would probably be unable to secure a new loan for less than 8 percent.
Variable Mortgage -Discount Mortgage
A prospective homeowner making a mortgage comparison should always consider a discount mortgage. Like a tracker mortgage, a discount mortgage offers a variable rate of interest. However, rather than tracking the Bank of England’s interest rates, a discount mortgage’s rate it tracks the bank’s standard variable rate. Those who hold a discount mortgage will see their payments rise or fall in accordance with the rate charged by the bank to other lenders.
An offset mortgage ties a borrowers savings accounts and his mortgage debt together. To obtain an offset mortgage, a borrower must have both a savings account and a mortgage from the same bank. The idea is simple: borrowers who take out an offset mortgage have agreed that the amount held in savings will be subtracted from the amount owed on the mortgage. In other words, a homeowner who holds a savings account with £15,000 pounds and owes £200,000 on a mortgage will only be charged interest on £180,000. However, he will continue to pay mortgage fees that reflect the full £200,000 mortgage, allowing him to pay off his mortgage relatively quickly.
There are many different types of mortgages, and consumers should conduct a careful mortgage comparison before deciding on any particular financial instrument. Those who select with care can reap substantial financial rewards.