We know that there are different types of mortgage loans, however, when you are at the point of buying a home, you need to know what type of mortgage is best for you.
The loan offers available from mortgage companies today are extensive and varied. However, despite the multitude of different brand names on the market, we can readily distinguish between four basic types of mortgage loans:
(a) Fixed Rate Mortgage Loan - In this type of loan, the interest rate remains unchanged throughout the life of the loan, i.e., the tax payable on the loan is kept constant. This gives prospective home owners some level of confidence that if interest rates go up, their loan will not be affected.
On the other hand, one obvious drawback of this type of loan is that, if interest rates fall, they may not benefit from it.
Another feature of such loans is that they usually have a set term (usually 12 to 15 years) and the early termination fee is higher. It is important to remember this fact if you plan to use part of the future savings to reduce the loan amount or period.
(b) Variable Rate Mortgage Loan: This is a loan type in which for the first year (or for the first period), the interest rate is agreed. For the remaining years, it keeps on changing according to the reference rate agreed in the contract, adding a spread that varies depending on the conditions set out in the terms of the agreement.
The main advantage of this type of loan is that you benefit from the interest rate cuts.
This type of loan is characterized by a longer maturity period which can be as long as 25 to 30 years, and the deferred sales charge is usually lower than is the case with fixed interest rates.
(c) Joint Interest Mortgage Loan: Here, the interest rate remains fixed for two, three or more years combined, and this is followed by another period in which it is variable and is adjusted according to the prevailing conditions in the market.
This mortgage plan combines both the merits and demerits of fixed and variable loans. Under this plan, the repayment terms and the early termination fees are usually similar to that of the variable rate mortgage loan.
(d) Flat Fee Mortgage Loan: As the name implies, it is a loan type characterized by a flat rate. It closely resembles the fixed-rate loans considering the fact that the customer always pays the same rate regardless of changing interest rates.
The one major difference is that if rates do go up, instead of the borrower paying more fees, the repayment period is extended; and if the interest rates fall, the repayment period is shortened.
The main disadvantage of this loan type is the level of uncertainty associated with it, as the actual term of the loan is unknown. However, its chief advantage is that you are pretty much guaranteed that the fee will not change during the lifetime of the transaction.
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