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Pros and cons of mortgages

Owning a home is a dream very many people have, but it is not a process that should be without due consideration to all the implications. The process of buying a home is expensive and the cost of maintaining the house once you have bought it is also expensive because you might find that you need to do things like renovations, repairs or pay maintenance fees.

The type of mortgage you take will depend on how you tolerate risk, how your personal situation is and the economic conditions of the market.  There are two major kinds of mortgage you can take an adjustable rate mortgage and fixed rate mortgage. 

 Adjustable rate mortgage (ARM).

These typically have low initial rates.  

  • Standard ARMs allow for payments to fall when market rates fall and they have a low initial rate. However, the reverse is also true because when the market rates rise, you have to adjust your payments accordingly thus no stability in terms of payment.
  • Convertible ARMs have the advantages and disadvantages of the standard ARMs but you have the benefit of being able to ‘lock’ in the low rates when they fall.  The initial rate is a bit higher than the standard ones and to take advantage of the lock aspect you have to pay a fee.
  • Two-step mortgage has a low initial rate which is fixed for a period of time. Payments will fluctuate depending on how the market is.
  • Balloon ARM is much like the standard ARM but you may need to refinance to pay off the balloon and the terms can, therefore, be very unattractive.
  • Interest-only ARM –   like the other ARMs, they depend on the market fluctuations but there is no reduction on the loan principal.
  •  Graduated payment loan – these have a lower initial monthly payment which increases over time; you need to be careful about the amortization schedule because it can be negative in the beginning and lenders may charge premiums.

Fixed-rate mortgage.

These do not depend on market fluctuations, therefore, providing a more stable payment option.

  • Conventional fixed rate loans– have stable payments but the initial interest is high
  •  Fixed rate balloon – it has a lower interest rate than conventional fixed-rate but you may need to refinance to pay it off, and the terms can be very unattractive.
  • Interest only loans – they have loan monthly payments and you need to refinance, renew or pay early and they offer no loan reduction through amortization.
  • Bi-weekly loans – these allow for smaller payments and you can pay them off quicker.

The decision to take a mortgage and the type of mortgage depends on the individual’s capability to handle their mortgage payments. It is not advisable to go through the process yourself, talk to a mortgage broker or financial experts to help you better understand what the mortgage rates mean in terms of payments of the interest and any penalties if you are unable to pay.