Which Mortgage? Part 1

There has been a large amount of media coverage relating to mortgages and more specifically the recent increase in interest rates. There are so many different types of mortgages that it could get confusing, but several of the most popular ones can be de-mystified.

Fixed rate mortgage:

This gives the borrower a feeling of stability as the payment amount will stay exactly the same throughout the whole period of the mortgage time. Most fixed terms are for five years or for three years, but in fact they are available for six months, and up to ten years. A fixed rate mortgage will allow for more efficient budgeting, as regardless of the increases (or decreases) in the interest rate, they will remain locked in for the duration. Some contracts allow for the possibility of changing, but there is often a large penalty payment for borrowers who want to alter the existing contract. Fixed rate mortgages are the winners if mortgage rates look like they will go up fairly significantly.

Reverse Mortgages:

This is a loan that allows you to access some of the equity that you have accrued in your home. It really isn't a mortgage because there are no immediate repayments. When agreed, you, or on your death your estate, will repay on the cash advances plus the interest. The owner of the house will still be responsible for repairs and property taxes etc. Many older people opt for this, so that they can remain in their own home and leave it to the children, but also have some spending money for themselves.

HUD Mortgages:

HUD stands for the Department of Housing and Urban Development. Part of HUD's mandate appears to sponsor loans to community and faith based organizations. There are a variety of programs offered, and if you think you can squeeze into this mandate check out the HUD web site.

Assumable Mortgage:

Here you will be taking over the mortgage that the previous owner already has in place on the house that you are planning to buy. This assumable mortgage is often a competitive interest rate (or else you do not want it), but it may require a large down payment. This will be because the previous owner has paid some of the balance off and usually the property has also increased in value. Beware of the odd clause that you would not wish to adopt - you will have to take the mortgage as is. This means that if you wanted to make a yearly lump sum payment off your principal and the option is not there, that is tough luck! In spite of the low interest rate that an assumable mortgage often carries, it is usually a bad financial move to take out a second mortgage in order to accommodate the assumable mortgage. If it is a very low rate, then you can do the math, but normal advice would be that if you can't find the higher down payment, then scrap it and negotiate a whole new mortgage.

In Part 2: Adjustable Rate Mortgages, VA Mortgages, High End Mortgages, Interest Only Mortgages, FHA Mortgages.