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Mortgages Allow Persons to Buy Their Own Homes Easily

Updated on December 14, 2012

It is the dream of every person to own a home. This is quite often a thing that a person does only once in a life time as it involves taking major financial decisions. The buying of a home is facilitated by various lenders offering loans in the form of mortgages. Most providers of mortgages, do require the borrower to make some sort of down payment for the home, before they agree to finance the balance.

Various Forms of Mortgages

Mortgages are of two types, which depend on the interest rate that is charged on the loaned amount. They are :

Fixed Rate Mortgages

Adjustable Rate mortgages

The fixed rate mortgage is one in which the rate of interest remains fixed throughout the tenure of the loan. This means that the monthly mortgage payments that are made are fixed. This is a stable way of taking loans, as it allows the person taking the loan to make long term financial decisions, as there is complete clarity on the amount of money that needs to be set aside for making such mortgage payments. Interest rates have to do with economic conditions. These are not exactly predictable, and so lenders choose to err on the side of safety and ask for higher rates of interest in fixed mortgages. This safeguards them to some extent from increase in interest rates.
Adjustable rate mortgages will start with a lender having to pay interest as per present market rates. This leads to lower rates and monthly payments than that charged for fixed rate mortgages. Such mortgages have some period for which the contracted rate is applicable, after which the lender is free to change the rate of interest and hence the monthly payments, depending on market conditions prevalent at that time. The period for which the initial rate is fixed can also vary from a couple of months to 10 years, depending on the original terms agreed. Rates can increase or decrease, and it is then up to the person taking the loan to adjust to the new realities. Adjustable rate mortgages are quite complex, and any person taking such a loan, must be fully aware of the implications before taking it on. Getting the proper advice from financial advisors can help.

Repaying Mortgages and Refinancing

Mortgages are usually repaid in monthly installments. The size of these installments can depend on the amount of the loan and the period over which the loan has to be repaid. Shorter terms result in higher monthly payments. These payments remain fixed as long as interest rates are not changed. The most common period for repayment of mortgages is 30 years.
There are instances where a person may feel that the rate of interest that is being charged on the mortgages taken is too high. This is quite often the case, when a person has a fixed rate mortgage at high rates, that are higher then the then present interest rates. This is the time when the option of mortgage refinancing can be looked at. In such cases, the new lender offers to pay off the balance loan and sign a new agreement for a loan for the balance loan that the home owner has yet to pay. This can reduce monthly payments. However, refinancing, does require some charges to be paid to the original lender as closure fees, and new entrance fees for the new loans. People looking for refinancing need to fully assess these total requirements, before they deciding on the refinancing.


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