A mortgage is a loan that is secured against a house or real estate which can be taken by the financial institution through foreclosure. This occurs on default in case that the borrower is unable to make regular payments. Secured loans are offered by banks, credit unions, and other financial institutions. The main features are term and method of repayment, interest rate, maturity, loan amount, and others. They vary from bank to bank. The credit score and income of the applicant and the down payment also play a role.
Financial institutions feature different types of loans with fixed and variable interest rates. There are fixed-rate, reverse, interest only, balloon, and other types of products. Balloon mortgages are offered with a fixed interest rate and term of repayment. The main benefit for borrowers is the low monthly payment. On the downside, the full outstanding balance is due at the end of the term. While affordable payments are an obvious advantage, this solution is for borrowers with good budgeting skills. An interest-only loan is another option for customers who are looking for a mortgage with a low monthly payment. They make interest-only payments over a specified period. Again, the full balance is due once the initial period is over. There are two options for borrowers – to refinance or pay a lump sum. Financial institutions also offer repayment and endowment products. The former allows the borrower to make payments toward the principal and interest charges until the loan is cleared. This solution is the least risky for borrowers.
Discount, offset, and tracker mortgages are more complicated. An offset mortgage, for example, links the principal balance to the borrower's savings account. The main advantage is that customers pay less interest because the savings are set against the loan balance. For instance, if a borrower has $35,000 in savings and an $80,000 loan, he is charged interest on $55,000. The monthly payment toward the principal is calculated on the full amount. This means that the borrower pays more toward the principal balance and less in interest. An offset mortgage allows repayment within a shorter period of time, and customers save a lot of money on interest charges. The only downside is that financial institutions usually offer higher interest rates than on other products. On the positive side, borrowers enjoy tax benefits because the account holder doesn't earn interest on his savings. A discount mortgage is another option for individual borrowers. The interest rate offered is linked to the bank's standard variable rate. Borrowers benefit from attractive interest rates that are usually lower compared to fixed-rate products. The problem with this product is that financial institutions can change the rate.
There are other products to choose from, including 6 month convertible, closed, open, conventional, all inclusive, and others. Bridge financing, home equity and high ratio loans, and secured lines of credit are also offered.
Borrowers can choose from products with different interest rates such as fixed, floating, discounted, cash back, and capped. With variable rate products, payments vary with interest rate fluctuations. A fixed rate is a good choice when the interest rate is about to increase. It is usually fixed for a period of up to 5 years. Capped rates are ideal for budget-conscious borrowers. While the interest rate fluctuates, it cannot exceed a specified cap. There are also cash back deals which are offered for particular products only. The main benefit is that borrowers receive cash back. On the downside, the bank may charge a hefty penalty fee in case the customer chooses to switch lenders.