The mortgage industry is very competitive. There are so many different products available and coming online that it makes sense for the consumer to shop around before making any decisions. The most popular general mortgage products available are the fixed-rate mortgage and the interest-only mortgage. This article will explain how the different mortgages work and point out some of the benefits and disadvantages of each type of loan.
A fixed-rate mortgage is a traditional mortgage that most people are familiar with. The rate is fixed throughout the loan so that the monthly repayments are predictable. This brings a great deal of security to the homeowner.
They can fit the mortgage repayments into their monthly budget and then forget about changes in the economy, current account deficits, inflation, and all the other paraphernalia that may be factored into the monthly deliberation on whether to move the base interest rates. The base interest rates are set by the reserve bank. They are the rate that mortgage companies and banks base their lending rates at plus a few percentage points.
The disadvantages of a mortgage rate quote for a fixed-rate mortgage are that the criteria for qualifying for this type of mortgage are stiffer. You will need a higher income and probably around 20-25% lump sum as a deposit. Generally, because the rate is fixed it will be higher than any other type of mortgage rate and there will be no payment flexibility.
By contrast, an interest-only loan is a mortgage where the homeowner can choose to pay only the interest on the loan rather than the principal plus interest. With some of these types of mortgages, the interest-only period can last for the term of the loan or the first few years of the loan and then revert to capital and interest repayments. Both adjustable and fixed rates are available for this loan type, and mortgage rate quotes can be obtained for an interest-only loan.
The main advantages of a mortgage rate quote for an interest-only mortgage are that it offers greater purchasing power, flexibility, and reduced qualifying income. Interest-only loan mortgage rate quotes have the disadvantage of a possible payment shock after the pre-defined interest-only payments. There can also be negative amortization and short-term security.
Interest-only mortgage rate quotes are aimed at making it easier to afford a mortgage. They are aimed at young people, first homeowners, or an expensive housing market. They are aimed at attracting business for the lenders because of this. It has to be remembered that, even though the monthly repayment is low the capital isn’t being paid off.
This means if there is no appreciation in the house price then no equity is being built on the house. Unless there is significant appreciation in the house price over the term of the mortgage or significant inflation that can erode the value of the original loan then you will have to come up with this original sum at the end of the term.
Fixed-rate mortgages are better over the long term, but harder to get into. These are more traditional options, with less inherent risk. Many homeowners would only consider a fixed-interest mortgage rate quote when shopping for a lender because they need security when providing a home for the family.