Getting a mortgage loan allows you to afford the investment involved in buying a home or other large property. The property acts as collateral for the length of the loan, which is paid off along with interest in monthly installments. Also known as liens against property or claims on property, mortgage loans are available with different structures to fit within your current budget.
The most common type of loan, a fixed-rate mortgage can last for ten, 15 or 30 years and retains the same interest rate for the entire duration of the loan. Choosing this type of mortgage makes it easy to budget because you always know what your monthly payment will be. These loans are best when rates are going up, although if the rates drop over the course of the mortgage, you can refinance to obtain a lower percentage. Despite having higher rates than other types of mortgages, 30-year fixed-rate loans are the most popular among homeowners who plan to stay in their homes for a long time.
Floating Rate Mortgage
A floating rate mortgage moves with the market rate, typically linked to the Official Cash Rate (OCR). Floating rates at any moment in time are often (but not always) lower that fixed rates, but that is because there is less risk for the bank, ie. if the OCR moves up then they get to move your floating rate with it.
Mortgage loans in which you pay only interest have much smaller monthly obligations but must be fully paid off at an agreed point in the future. Basic interest-only mortgages can be finished with a fixed or adjustable loan structure. If you expect to come into more money at a specific time in the future, you can opt for a balloon mortgage where the remainder of the loan is paid off all at once in what’s known as a “balloon” payment.
How to Choose the Right Loan
To determine which mortgage structure is right for you, first figure out how much money you actually need to borrow to buy the home you want. Discuss each option with a loan officer at your bank, carefully assessing your budget as you do so. Most lending institutions will put a limit on how much you’re allowed to borrow based on your ability to make monthly payments.
Before obtaining any kind of loan, ask about the down payment and the fees associated with the mortgage. There may be charges for late payments, early repayment penalties, closing charges due if you refinance or a fee for assessing the property. Comparing these fees to the available interest rates will help you figure out the true cost of the loan. You should also consider the current trend in mortgage rates and how long you plan to stay in your new home.
With the right mortgage type, you’ll be on track to own your property or to move on to another area as you desire. Work with a reliable lender to choose terms that provide the lowest rate and most affordable monthly payments available.