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Posts Tagged ‘repayment’
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Just as there is more than one type of mortgage loan, there is more than one type of mortgage repayment. If you are thinking about buying a home, you need to know up front how you would like to repay your mortgage.
There are two basic repayment options. First, there is a “Repayment Mortgage”. This sort of mortgage allows you to repay a tiny part of the actual loan each month while also paying the interest.
Monthly mortgage payments on a repayment mortgage are high, comparatively speaking. On the plus side, when you make your last payment you are really making your last payment.
One of the negative things about this kind of mortgage is that the monthly payments can increase. If insurance or taxes increase, this will translate to the mortgage holder needing more money from you in order to pay these things. Fortunately, any increases are usually minimal.
The second type of mortgage is an “Interest Only Mortgage”. This type of mortgage requires you to make payments on the interest every month. The problem here is that once the term of the loan is up, you will still owe the entire amount of the original mortgage.
The way most people make this work is by opening a savings account or some other type of investment account. They will make monthly payments into this account while making their interest only payments, too. This way, at the end of the term, ideally they will have enough to pay the original mortgage in full.
This is much more risky than a repayment mortgage. There are many variables which cannot be predicted or controlled.
For example, if you invested in the stock market in order to cover your mortgage loan and your investment lost money, you would not have enough money to pay your mortgage. This is commonly referred to as a shortfall.
In the past, interest only mortgages were very popular. In recent years, though, they have lost much of their appeal. So many people have lost money in various investments, they are reluctant to take any more chances with any money they have left.
The type of repayment plan you should choose will depend on your specific set of circumstances. There really is no right or wrong decision. Assess your situation, consult a mortgage broker if you feel the need, and make an informed choice. Having all the information is the key to being comfortable with your choice.
Tags: mortgage, repayment, types, uk
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