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Types of Mortgage Loans

Several types of mortgage loans are available to home buyers to help them choose a loan according to their specific needs. One of the basic classifications of a mortgage loan is conventional vs. high ratio mortgage. Depending on how much you can afford to put up as initial funding, you can avail one or the other. If you can put up more than 25% of the value of the property, you can avail a conventional mortgage, which entails a lower interest rate. On the other hand, high ratio mortgages are more expensive because of the greater risk involved for the lender.

Here is a small guide on other classifications and types of mortgage loans to help you select the right one for your home:

Open and Closed Mortgages

An open mortgage is generally a short-term mortgage where you can pay off part or the entire loan before the due date without attracting a pre payment penalty. In contrast, a closed mortgage entails a penalty if you prepay the loan before the end of the term of mortgage. Open mortgages are typically costlier and have higher interest rates.

Fixed Rate and Variable Rate Mortgages

Fixed rate mortgages are the most favored among home buyers, as they require a fixed amount to be paid each month, which keeps you in control of your monthly finances. The interest payable in such a mortgage is predetermined and fixed at the time of taking the loan, and holds good for the entire term. This way the buyer is protected from any increase in prime lending rates in future.

The variable rate mortgage, on the other hand, has an adjustable interest rate, which can be altered from time to time depending on the market situation. These loans may be beneficial for you if there is a sudden fall in lending rates, but a hike in interest rates would mean greater monthly payments for you.

First and Second Mortgages

The first mortgage is simply the first loan that you take for financing your property. However, if you need more cash in the future for any purpose, you could take a second mortgage loan against your equity in the house. The second mortgage usually comes at a higher interest rate as the risk for the lender is greater. The second mortgage is subordinate to the first, that is, in case of a default, the first mortgage lender would have the first right to recover the money.

Home Equity Line Of Credit

The home equity line of credit makes your investment in the house work for you while you are still paying off the loan. Under this mortgage system, you are given a line of credit against your equity in the home, which you can use for any purpose according to your need. As your equity in the house increases, the line of credit can also be increased.

An experienced and reliable mortgage advisor can help you choose the right type of mortgage loan that suits your needs and financial situation. He or she can also inform you about the variable aspects in various types of mortgage loans than can be customized to your specific needs.

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