How to Choose between Different Types of Mortgages

With so many different types of mortgage available, it’s difficult to determine the right one for you. Before you start looking at available mortgages, however, it’s important to first evaluate your finances, as your financial situation is an important factor that will dictate the type of loan you need, and how much you can afford to borrow.

Step One: Evaluating Your Finances

Before you even think about the type of mortgage you should obtain, it’s important to evaluate your financial situation. Check your credit rating and FICO score, evaluate your income and debt level, figure out the size of the down payment you can afford, and determine how much mortgage you can afford and what your credit rating will allow you access to.

When it comes to your credit rating, know that between 620 and 699, you’ll probably pay a higher interest rate than if your credit rating is over 700, due to a slightly higher perceived risk on the part of lenders. If your credit rating is below 620, you may find it’s better to wait and improve your credit rating rather than be forced into a sub-prime mortgage with a high interest rate.

Step Two: Choosing the Best Mortgage

Once you have completed an evaluation of your financial situation, you’re ready to start thinking about the kind of mortgage you want. The mortgage that best suits you will depend on a long list of factors, not all of which are related to the amount of money you have for a mortgage. Think not only about how much mortgage you can afford, but also your credit rating, how long you plan to stay in the home, and whether you think your plans or financial situation might change in the future.

So what are your main mortgage options?

Fixed rate mortgage

 

Normally a 10, 15, or 30-year mortgage, you pay the same interest rate over the life of the loan.

Good for: If you like the security of paying the same amount every month and you’re planning on owning the home long-term, this is definitely the best option. There are some variations on this theme, including jumbo mortgages, which are larger-than-standard loans with a slightly higher interest rate.

Adjustable rate mortgage

 

These are mortgages with adjustable interest rates, which come in several different varieties. When you first get an adjustable rate mortgage the interest rate is lower than that you’d get with a fixed rate mortgage. However, at intervals, the interest rate can increase or decrease according to current market rates. This means your monthly repayments aren’t fixed, so these types of mortgages are more risky in comparison to fixed rate mortgages.

Good for: If you want a mortgage with an initial low rate and you’re prepared to take a risk on later rates (or you only plan to own the home for a few years), this may be a good prospect.

Interest-only mortgage

 

The standard type of mortgage is amortized, meaning your monthly repayments include both principal and interest. An interest-only mortgage is just what its name suggests – your monthly repayments don’t have to include principal (but you can pay off principal amounts at any time). This means you are not building up equity in your home while you’re only paying interest, but there are no pre-payment penalties.

Good for: This type of loan can work well if your income is at a consistent level overall but is subject to highs and lows, since you can pay off extra principal when you can afford to do so, and pay interest only when your income is at a lower level.

Balloon mortgage

 

This type of mortgage has a fixed interest rate and stable repayments over the life of the loan, with lower repayments in comparison to a fixed rate mortgage. However, the terms of the loan are generally short, with three, five, and seven years being the most common options. At the end of this time period, the entire balance of the loan is due. The final payment is typically very large, so a balloon mortgage is one which shouldn’t be taken lightly.

Good for: This type of mortgage can be a good option if you plan to stay in the home long term, want to get your mortgage paid off quickly, or if know you can afford the balloon payment. Alternatively, a balloon mortgage can be useful if you know you’ll be moving or refinancing before the balloon payment is due.

30-due-in-7

 

For the first seven years of the mortgage you have a fixed interest rate which is generally lower than that of a standard fixed rate mortgage. In the eighth year of the mortgage, the interest rate changes to be in line with whatever the current rate is at that time. For the remaining 22 years of the mortgage, the interest rate stays fixed at that rate. Another option is a 30-due-in-5 mortgage, where the interest rate changes in the sixth year.

Good for: These mortgages can be a good option if you’re planning to stay in the house for more than five or ten years and you are willing to risk the possibility that your monthly payments may change substantially when the second interest rate is due.

About the Author

Rachel Jackson is a freelance writer who writes about topics and pertaining to the mortgage industry such as refinancing home mortgage.

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Honesty Is The Best Policy

Some of the UK's largest insurers have introduced some attractive policies for 17-29 year olds to help them with their No-claims bonuses.For example.a rapid bonus scheme whereby you insure the car for nine months, at the end of which you are credited with a full year's no-claims bonus.The advantage of this sort of policy is that you can build up a full five-year bonus in less than four years.

Earlier in 2008 one large insurer introduced a "Pay-As-You-Go"insurance initiative which was reliant on GPS systems installed in drivers cars.Unfortunately, this has been withdrawn from the market.On this scheme, the insurance premium was worked out by assessing the mileage and times of day the car was driven.So, if a motorist did more miles at off peak periods where the risk of an accident was lower, they would pay less for their car insurance.

A representative from the insurance company said, "The scheme was open to young drivers and we were able to cut their premiums.We saw a 30 per cent fall in accident rates as people thought about their car use.We had hoped, though, that the car manufacturers would start offering the GPS boxes as standard.Ultimately, the expense meant we had to call a pause."

Another insurer offers a similar scheme.

Here, cheaper premiums are offered to 17 - 22 year olds who agree not to drive between 11pm and 6am.The scheme uses GPS technology to check whether the car is used during "curfew".If it is driven during the curfew, they incur a 25 pounds penalty.This means that people can still drive at night but they have to pay for the privilege.

"We are trying to understand the dynamics of the young driver market and see what technology can do for us and the policyholder.The big idea is to price more accurately, so responsible younger drivers can avoid very high premiums" says a representative from the insurer.It is estimated that it cost 250 pounds to install the GPS technology but, for many young drivers, it is worth it.

Of course, there are conventional ways to reduce premiums.For example, look at taking the Pass Plus driving course.This advanced qualification can bring discounts of 10 per cent on premiums.

Careful consideration when choosing a car make and model can make a difference to insurance cost.Go for a smaller car in a low insurance group.And consider if you should go with third party, fire and theft cover rather than fully comprehensive, and whether you need the car for commuting or just leisure driving.

Or, voluntary excess is another recommendation.Younger drivers will have an excess imposed, but by agreeing to a slightly larger one, the premiums can be cut.

The message from all insurers is to not be tempted into what is called "fronting".This is where the car is insured by one driver but mostly driven by someone else.One of the first things insurers check when a claim comes in, is whether there has been any fronting.So it's not a wise move.

Unintentional Fronting

Kev O'Sullivan, 26, unintentionally fronted, "I had a Fiesta insured in the name of my parents but I took it to university with me.

It was only afterwards that I realised I had been fronting.The campus is quite out of town, so lots of students drive and all the ones I knew were insured in the name of their mothers or fathers.It was the only way that premiums were even remotely affordable.Why would any 18-year-old buy car insurance?"

About the Author

Get great deals on Car insurance from The Car planner.

Please visit our site for helpful articles on Car insurance.Visit Brokers Online to benefit from its extensive article library covering most areas of uk finance.They also offer Car Insurance Quotes, Mortgage Quotes and much much more all online.

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