Mortgage Types and Their Components

What exactly is a mortgage? A mortgage is actually a loan where real estate or property is used as security against the loan amount. This is done so that the bank (lender) can get money for when the property is no longer usable as collateral. The borrower enters into a contract with the bank with the agreement that after he pays back the bank in full, the borrower gets money upfront and makes periodic payments to the bank until he pays off the bank. Usually this is done on an installment basis.

There are two types of mortgage loans; interest-only and repayment-mortgage-loans. In the interest-only loan the borrower has to pay interest only on the principal balance, but interest is not applied to capital gains or income taxes. Also, principal and interest are not taxed until the full loan is paid off. On the other hand in repayment mortgage loans, interest is tax deductible up to a certain amount depending on the type of loan and the amount borrowed. This type of loan can be beneficial for those with adjustable rate mortgages (ARM).

In general, there are three kinds of mortgages: fixed-rate mortgages, adjustable rate mortgages (ARM), and interest-only mortgages. Fixed-rate mortgages have a specific interest rate for a definite period of time while ARM mortgages have an interest rate that goes up and down along with market rates. Some fixed-rate mortgages offer prepayment penalty for borrowers who opt for balloon payments. Interest only mortgages only pay the interest for the first month and then the balance goes to the principal.

Before choosing a mortgage deal, make sure that you get the best rate and the lowest monthly payments. There are many variables such as the mortgage lender’s reputation, track record, etc. Research these details before approaching the lender with your plans. You may also want to talk to your friends, family and relatives who have already taken out a mortgage to know about their experiences in taking a mortgage.

Another important factor is to shop around for the best mortgage rates. Different lenders usually charge different rates. Although interest rates are the most common mortgage types, it is advisable to research and compare the rates of other lenders so that you can find the most competitive package. You may want to use the mortgage calculator that is available on the Internet to determine the amount of your monthly payments. You may also want to take the mortgage offers that come through the mail to determine the mortgage rates.

To get competitive mortgage rates, it is advisable to get free quotes from at least three mortgage rates lenders. Comparing quotes will allow you to see the gaps in the different schemes. For example, you can compare the interest only mortgages with the repayment mortgages. The quotes that you can get on the Internet are always free of charge so it is not difficult to compare them.