Mortgages: How the Different Types Can Benefit You

Homeownership is a dream many people seek to make reality. Unless you’ve inherited, stumbled upon, or just got lucky enough to have a large sum of money in your possession, you will likely utilize the assistance of a mortgage. There are three different mortgage types commonly used and what follows is an explanation on how each works and the benefits as well as adverse affects of using each of them.

30-Year Mortgage

Here in the United States, if you asked what type of mortgage people utilize to purchase their homes, it would be the 30-year fixed mortgage. This is the most popular because it’s the tried and true method into homeownership and it allows for the smallest monthly payment. The positive side of the 30-year is in fact you do have a lower monthly payment, but the negative is you end up paying more in interest over the life of the loan. Most, if not all banks will allow you to pay more towards principal each month, which reduces the total interest paid over the life of the loan if you choose to do so.

15-Year Mortgage

Similar in nature to the 30-year fixed, there is the shorter 15-year fixed mortgage. This is for the person who wants to payoff their home quickly, which saves you in total interest paid compared to a 30-year. The only potential negative is the monthly payment is larger, but keep in mind the interest rate is typically lower then that of its 30-year relative. Another situation where this may fit well is for someone who has a large down payment, as the total amount being finance will be smaller.

Second Mortgage

This type of mortgage category is for the person that already has a home but has equity in the property. There are two primary loan types, a line of credit on the equity in the home or a lump sum payment second mortgage that works similar to a first mortgage. Most banks will only lend if they are in first or second lien position, so this may only work for people who currently have one lien holder on the title.

The line of credit is similar to a credit card in that the line of credit stays open for a certain amount of time, typically ten years. After those ten years, the remaining balance is then repaid over another ten-year period. Of course these can be refinanced and adjusted with new terms, but this is how a line of credit typically functions.

The second mortgage is a lump sum payment note that works similar to a traditional mortgage. There is agreed upon loan terms that include note length, amount, and an amortization schedule. A second mortgage is usually shorter in length than a traditional mortgage, but can be used for debt consolidation to home repairs to a down payment for another home.

When it comes to mortgages, never rush into a decision, as you need to properly research what fits your current situation. Never hesitate to ask questions and obtain different rates from all your local lending offices, and never hesitate to negotiate. Homeownership is a proud moment in many people’s lives and it shouldn’t be ruined because of a poor mortgage deal.

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