When you are searching for a mortgage, no matter if it is a first, second, or refinance, you have different options on repaying it which some people don't realize. So, before you just take whatever is on the paperwork, you should consider the following options:
Capital and Interest Payments
This is the most common way to repay your mortgage, since you make your payments each month on the capital, or principle, of the loan. In the U. S. , this is called amortization and in the U. K. , this is called a repayment mortgage. These types of loans are set anywhere from 10 to 50 years, depending on the lender and where you live. The payments that you give to the mortgage company each month take a percentage and place it toward the interest and the rest goes toward the capital of the loan. Earlier in the loan, most of the payment goes toward the interest and toward the end most of the payment goes to the capital.
Interest only repayment.
While this type of mortgage is not widely used in the United States, it is in the UK. Basically, in this type of mortgage, the capital isn't repaid through the term of the loan, instead, you make regular ‘payments’ to an investment account or plan that helps you to build up a large lump sum that will in turn repay the mortgage completely at the end of the loan. This is usually referred to as an “investment-backed mortgage” or as any of these types of mortgages: “Personal Equity Plan Mortgage”, “Individual Savings Account Mortgage”, or a “pension mortgage”. So, when you hear any of these terms, you will know what the mortgage broker is talking about. These types of mortgages offer some great tax advantages, so just ask your mortgage broker about them.
No interest or capital payments.
If you are an older person, this might be the way for you to go. Some mortgage companies offer a mortgage that is usually referred to as a “reverse mortgage”, “lifetime mortgage” or an “equity release mortgage”, it just depends on where you live and where the mortgage company is located. Basically this type of mortgage is just compounded each year, with the interest rolled up into the capital. The only problem is that the debt increases each year that the mortgage is open. One of the reasons that these loans are meant for older people is that they are not usually repaid until the borrowers pass away.
There are also several other, less common, ways of repaying your mortgage you will just need to check with your lender to see what types of payment plans and options they offer before you sign your mortgage paperwork. You might be able to get a better payment plan by going with a less conventional way of repayment.
Connie Barker is the owner of several financial websites including those that deal with Repaying Your Mortgage