Mortgage Loan
Buying your home is one of the biggest decisions that you
will make in your lifetime, it is surely up there with getting
married. They say that a man’s home is his castle; it
is certainly a place where he spends a lot of time. Your home
is where you come back to after a hard day at the office,
a place to relax and unwind. A mortgage loan is in effect
a personal loan that is taken out with a bank and used to
pay for a house or piece of real estate. The lender is then
paid back their lump sum in monthly instalments over a fixed
period of time. Like personal loans, mortgages are subject
to interest charges.
There are essentially two kinds of mortgage, repayment only
and interest only. Interest only mortgages entail monthly
repayments that consist only of interest payments. The capital
repayments are paid into an alternative vehicle such as an
endowment policy, ISA or pension scheme, it is this repayment
vehicle that repays the lender with the capital at the end
of the mortgage term. Each type of repayment method has its
bonuses, though it is important to choose what is right for
you.
When taking out a mortgage loan you will need to give careful
consideration to the interest rate. Here are four types: fixed
rate, variable rate, capped rate and discount rate.
· With fixed rate mortgage loans the interest rate
remains at a fixed constant level for a certain length of
time, regardless of market fluctuations. At the end of the
fixed rate term, the interest rate returns to the lenders
standard variable rate (SVR).
· Variable mortgage loans consist of interest rates
that will constantly vary according with market conditions.
· A capped rate mortgage loan is when a lender caps
the repayable interest rate at a maximum level; if the SVR
drops below the capped rate, the interest payable is based
on the lower variable rate whereas if the SVR rises above
the capped rate, the interest payable is based on the capped
rate, and not the higher SVR.
· A discount rate mortgage loan features a variable
interest rate, but with a fixed discount for a certain period
of time e.g. a variable rate of 5% with a discount of 2% means
that the interest payable is 3%. The discount value of 2%
remains constant regardless of the variable rate.
The repayment only method, on the other hand, consists of
capital repayments and interest charges, much the same as
the payment process for paying back a normal personal loan.
The advantages of this type of mortgage loan are that you
can pay off lump sums, thus reducing the interest and capital
amounts repayable. Another benefit of this type of mortgage
loan is that, come the end of the repayment term the borrower
is secure in the knowledge that the mortgage loan has been
totally repaid. There are drawbacks in this type of mortgage
loan, due to the fact that the bulk of the loan payments made
early in the repayment term consist mainly of interest payments.
A borrower that moves home frequently might find this type
of mortgage loan a disadvantage as little of the actual mortgage
loan gets repaid.
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