The mortgage industry is highly competitive. There are so many different products available and coming online that it makes sense for consumers to shop around before making a decision. The most popular general mortgage products available are the fixed rate mortgage and the interest-only mortgage. This article explains how the different mortgages work and points out some of the pros and cons of each type of loan.
A fixed rate mortgage is the traditional mortgage that most people are familiar with. The interest is fixed during the term of the loan, so that the monthly repayments are predictable. This gives the homeowner a lot of security. They can fit the mortgage payments into their monthly budget and then forget about the changes in the economy, current account deficits, inflation and all the other paraphernalia that can be factored into the monthly deliberation on whether or not to change base interest rates. The base interest rates are set by the reserve bank. These are the rates on which mortgage lenders and banks base their interest rates plus a few percentage points.
The disadvantages of a mortgage interest deduction for a fixed-rate mortgage are that the eligibility criteria for this type of mortgage are stricter. You will need a higher income and probably around 20-25% lump sum as a down payment. Generally, because the rate is fixed, the rate will be higher than any other type of mortgage interest rate and there will be no payment flexibility.
An interest-only loan, on the other hand, is a mortgage where the homeowner can choose to pay only the interest on the loan instead of the principal plus interest. With some of these types of mortgages, the grace period can last the life of the loan or the first few years of the loan and then revert to principal and interest payments. Both adjustable and fixed rates are available for this type of loan and mortgage interest agreements can be requested for an amortization only loan.
The main benefits of a mortgage interest deduction for an interest-only mortgage are that it offers greater purchasing power, flexibility, and lower qualifying income. Interest-only mortgage interest rates have the disadvantage of a possible payment shock after the predefined interest-only payments. There may also be negative depreciation and short-term security.
Interest-only mortgage interest rates are designed to make it easier to pay a mortgage. They are aimed at young people, starters or an expensive housing market. Because of this, they are focused on attracting business for the lenders. It should be remembered that even if the monthly repayment is low, the capital is not paid off. This means that if there is no increase in the value of the house price, no equity will be built on the house. Unless there is a significant rise in home prices over the life of the mortgage or significant inflation that could erode the value of the original loan, you will need to come up with this original amount at the end of the term.
Fixed rate mortgages are better in the long run, but harder to get into. These are a more traditional option, with less inherent risk. Many homeowners would only consider a fixed rate mortgage when shopping for a lender because they need security when providing a home for the family.
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