Banks are providing a lot of variety to the mortgage loan. There are different types of mortgage loans with different requirements and repayment methods. Choosing the best mortgage plan would lead to easy payment and sometimes, result in lowering the monthly payment too. On the other hand, there is a risk factor associated with each type, which the lender might not reveal to you.
Fixed rate mortgage
This is the basic home loan type. The interest rate would remain the same, till the end of the payment and thus, the monthly payment would also remain the same. This would help in easy calculation and also avoid the problem of worrying about changes in the interest rate and how it would affect you. In 2010, 90% of the loans taken were the fixed rate mortgage.
The interest rate of the loan will be higher than the other types. However, even when the interest rate increases, you would be paying the same. On the same note, even if the interest rate decreases, you would be paying the same. In case of an adjustable mortgage plan, there is always a risk factor of increase in payment with the increase in the interest rate. With the interest rate at the bare minimum, there are more chances for the rate to rise in the future than to fall and thus, it is better to opt for fixed interest rate mortgage plan instead of the adjustable interest rate mortgage plan.
The loan with a shorter time period would have a high interest rate than the others. This is because the monthly payment amount would be high and the lender would get back the amount soon. Thus, the 15 year mortgage loan is a better option than the 30 year loan, when it comes to the interest rate. The financial gurus state that unless one is very sure that one would be able to pay such a high amount, it is better to opt for the 30 year mortgage loan.
Interest only mortgage plan
It is similar to that of the fixed mortgage plan, but for the first 5-10 years, the borrower needs to pay only the interest and not the principal. This would help the borrower to work on collecting the required funds. After the specific period, the interest rate and the monthly payment would need to be paid. Usually, this plan leads to foreclosure as the borrower is be able to tackle the increase in the payment.
There are also other types of mortgage plans, which needs different requirement, risk factors and payment methods. It is important to learn the pros and the cons of each plan, before opting for one.