What Are the Different Types of Mortgages?

A home loan is a very important financial decision that anyone has to take in their lifetime especially while planning to buy a home. There are all sorts of mortgages depending on the requirements and terms of the mortgage, the rates provided and the level of flexibility. Below is the overview of the main types of mortgages in Northern Ireland that we have to offer to make the process of decision-making easier.

1. Fixed-Rate Mortgage

A fixed-rate mortgage means the interest rate does not change for the whole term of the loan and therefore, the monthly payments made remain constant. These mortgages are normally offered with terms ranging from 15 years, 20 years or 30 year options. It is ideal for the people who wish to live in a particular house for many years and want a fixed cost of the property.

Benefits:

• Predictable payments

• Stability against market fluctuations

Drawbacks:

Initial costs relatively higher than that of adjustable rate mortgage (ARMs).

2. Adjustable-Rate Mortgage (ARM)

Adjustable-rate mortgage (ARM) – its interest rate is lower than that of fixed-rate mortgage in the beginning but it can change after a stipulated time which is usually 5/7/10 years. Basing on the market forces in this case credit risk, it can change after every one year period.

Benefits:

• Lower initial interest rates

• May be economical if you intend to later sell or refinance before the introductions of the adjustable rates.

Drawbacks:

Hazardous future instalment payments because of fluctuation of the set rates

3. Interest-Only Mortgage

Interest-only mortgages means that the buyer pays the interest on the mortgage fee for a specified period of time, usually the first five to ten years and then pays an instalment comprising of both principal and interest. Such loans have low first periodic payments that will result in high payment balances.

Benefits:

• Lower monthly payments initially

• It is good to use for people who anticipate a rise in wages.

Drawbacks:

• Interest only period can lead to payments which are much higher after a certain period of time.

• This is the risk that caused one not to build any home equity during the interest-only phase.

4. FHA Loan

FHA loan is a loan issued under the Federal Housing Administration and it is fit for the first-time buyers, or those with a low credit rating. It availabilities lower down payments starting from 3.5% and less stringent credit conditions.

Benefits:

• Lower down payment requirements

• Lower credit rating of the buyer does not have to be qualified to acquire these assets.

Drawbacks:

All sorts of expensive features such as mandatory mortgage insurance premiums (MIP) are there.

5. VA Loan

A VA loan is offered to the active duty military personnel, veterans and their families and is backed by the Department of Veterans Affairs. VA loans come with guaranteed attractive interest rates, flexible terms which allow the buyer to close a deal with no down payment and no PMI.

Benefits:

• No down payment required

• No PMI, which translates to smaller monthly instalments

Drawbacks:

Available only for the veterans and the service members

6. Jumbo Loan

A jumbo loan is created for such buyers who require more amounts than those provided for by the FHFA. These are used to acquire expensive houses or Apartments or other dream houses.

Benefits:

• Makes it possible to buy expensive houses

• It can be used for higher amounts of loans which are not tenable under normal loan amount range.

Drawbacks:

• Stricter credit requirements

• Higher interest rates as compared to the normal loan rates.

7. Conventional Loan

Non-conventional loans are not guaranteed by any government agency and may call for higher credit scores and a large down payment as compared to the government supported loans. It can either be conforming loans which meet the standard laid down by the Federal Housing Finance Agency or non-conforming loans.

Benefits:

• Less interest fees via overall borrowing as compared to government-guaranteed loans if one has a good Fico score

• More flexible property options

Drawbacks:

• Stricter qualification standards

• Banks often demand the borrower to have private mortgage insurance (PMI) where the down payment is less than 20%.

Knowledge on the various types of mortgages is however useful when one is planning to buy a home. Depending on whether you want to pay the same amount throughout the time you are repaying your mortgage, whether you want a lower initial interest rate or not, as well as whether you are a veteran or in need of a FHA insured loan, the type of mortgage is very important in order to understand how to best manage one’s money. One must remember financial prospects, future activities and their sensitivity to risk while making the decision.

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