If you are considering buying a house, you are likely interested in knowing what financial institutions offer different types of mortgages. It is essential to be aware of the main characteristics of each product so you can sign a mortgage according to your needs. Signing a mortgage is perhaps one of the most critical decisions in your life, so you should be well-informed.
Below are the most critical features of mortgage products banks currently offer and information regarding repayment versus interest-only mortgages.
Repayment Mortgages vs. Interest-Only Mortgages
Often, mortgages are arranged based on repayment, called a Capital and Interest mortgage. You will be required to repay borrowed capital and the portion of the interest you accrue. At the end of the term, when all payments have been made, you have paid the actual borrowed amount and interest to purchase your house outright. Fortunately, there are mortgage term options you can select, whether you prefer it to be shorter or longer, and are dependent on your capacity for monthly payment.
People arrange some mortgages based on an interest-only basis. You must repay your monthly interest rather than the capital you have borrowed. However, you will be required to pay off the borrowed amount at the end of the mortgage term. Interest-only mortgages can be helpful because monthly payments will be lower than the amount you pay in a repayment mortgage.
Mortgages Based on Interest Rate
- Mortgages at a fixed rate: The fixed-rate mortgages are those in which the interest rate does not change, and therefore, the same monthly payment is paid throughout the life of the loan. This type of mortgage is an exciting alternative that is gaining market traction. In the long term, fixed-rate mortgages may be more expensive than variable-rate mortgages. However, loans with a fixed interest rate do not have long terms, generally 20 years. Conversely, variable-rate mortgages tend to extend to 30-40 years.
- Variable-rate mortgages: In a variable-rate mortgage, the monthly installments vary depending on the type of mortgage reference. One of the official reference types of the mortgage market and most used in the United States is the Euribor. In the United States, 93.6% of mortgage loans have a variable rate compared to around 7% of fixed-rate mortgages.
- Mixed-rate mortgages: Mixed-rate mortgages combine variable and fixed interest rates. In these cases, a percentage of interest may vary depending on a benchmark such as Euribor, and the other would be a fixed interest rate agreed upon with the bank.
Additional Mortgage Types
- Mortgages with fixed or constant rates: This type of mortgage is highly demanded and is composed of a part of the interest and another part of the requested capital. During the first years of the mortgage, the portion of interest to be paid is high, and the amortization of capital is low, reversing this situation over the years.
- Mortgages with armored installments: The monthly payment in an armored installment mortgage is always the same regardless of what happens with the interest rate. The only thing that changes is the number of terms depending on whether the interest rate increases or decreases.
- Mortgages with final installment: In this case, a part of the requested capital is paid in the last installment, which is usually around 30%. If this type of mortgage is taken, bear in mind that money must be saved to cover the payment of this last installment.
- Mortgages with increasing share: In this mortgage class, the quota grows a certain percentage every year, to which the variations must be added to the interest rate.
- Mortgages “only interests”: this type of product is not as popular in the US, although people from abroad widely use it. In the monthly installments, no capital is amortized; only interest is paid. Once the installment period ends, the homeowner must pay the full amount of the requested capital or sell the house to cancel the debt.
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