Home
Purchase Explained
So you’ve found your dream home and you’re ready to explore the different types of mortgages available to you. It’s easy to be overwhelmed by the choice of mortgages but finding the right one is a relatively easy process. The vast majority of people cannot afford to fund their home purchase with cash reserves and have to look at a financial institution to borrow money from.
Basically a mortgage is an agreement between you and a bank or other financial institution which outlines a certain level of interest which you will pay them over a certain period of time in addition to the amount you have borrowed from them. The amount you have borrowed is secured against your home so if you cannot make these payments, the bank will assume ownership of your home.
As home loans are taken out over a long period of time, say 25 years, the level of interest is a lot lower than other types of loans e.g personal loans or credit cards. There are essentially two types of home purchase loans – a fixed rate loan and a variable rate loan.
A fixed rate loan sets the level of interest that you will be charged over a period of time. This is a popular choice as borrowers have the security of knowing exactly how much their monthly payments will be. Another advantage is that you will not be subject to any external factors which may affect interest rates.
A variable rate loan is one where the interest charged fluctuates over the period of the loan. The rate is linked to the prime interest rate set by the Federal Reserve Bank. So if the interest rates are lowered, your monthly payments will be reduced and if the interest rates are raised, the monthly payments will increase. This type of loan doesn’t suit everyone as it makes it more difficult to plan you monthly budget as your mortgage payments will fluctuate. But for borrowers who are not sensitive to fluctuating interest rates, then this type of loan can work in their favor. Borrowers can take advantage of periods of low interest rates.
Whichever option you choose, you must ensure that you examine all aspects of mortgages thoroughly. There are many options available to you and you must choose one which suits your needs. |
