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Different Types of Mortgage
There are two main types of mortgage that are commonly available, Fixed Rate and Floating (also called Variable rate or revolving credit). A Fixed rate loan offers security and ease of budgeting by keeping the interest rate of the loan fixed for a specified term, generally 1 to 5 years. Floating Rate mortgages do just that, they float. Over time the interest rate will fluctuate and change, but is generally always higher than the cheapest available fixed rate.
Floating rate loans:
So, why Float if it's usually more expensive? A few reasons. Firstly you can make lump sum repayments any time you want. The mortgage acts like big overdraft, so you can freely pay it off as quickly as you like with no penalites. Secondly you can change from a floating to a fixed mortgage any time you like, at no charge. Thirdly you can draw back against you loan in the case of an emergency. If you've aggressively paid down your mortgage but suddenly need to get back some of them money you've put on it, you can. While not recomended, it is a safety blanket many people like.
Sounds great, is there a down side? Yes there is. As mentioned earlier the Floating rate at any given time is usually more expensive than almost all fixed rates. also, the interest rate can go up with no warning if market conditions change, eroding your repayments. By having your mortgage Float you get flexibility but at the cost of higher interest and unpredcitability.
Fixed Rate Loans:
Many people like fixed rate loans as they offer a lower rate of interest than Floating mortgages, which means your repayments go further. You know exactly what your repayment amounts are for the length of the fixed term and the rate doesn't change, so you are insulated from rising interest rates. The down side is that if interest rates drop (as they have recently) you will not be able to take advantage of them until your fixed rate term expires, unless you are willing to pay and Early Repayment Adjustment or "break fee". these fees can be very significant and are discussed in more detail here.
Floating rate loans:
So, why Float if it's usually more expensive? A few reasons. Firstly you can make lump sum repayments any time you want. The mortgage acts like big overdraft, so you can freely pay it off as quickly as you like with no penalites. Secondly you can change from a floating to a fixed mortgage any time you like, at no charge. Thirdly you can draw back against you loan in the case of an emergency. If you've aggressively paid down your mortgage but suddenly need to get back some of them money you've put on it, you can. While not recomended, it is a safety blanket many people like.
Sounds great, is there a down side? Yes there is. As mentioned earlier the Floating rate at any given time is usually more expensive than almost all fixed rates. also, the interest rate can go up with no warning if market conditions change, eroding your repayments. By having your mortgage Float you get flexibility but at the cost of higher interest and unpredcitability.
Fixed Rate Loans:
Many people like fixed rate loans as they offer a lower rate of interest than Floating mortgages, which means your repayments go further. You know exactly what your repayment amounts are for the length of the fixed term and the rate doesn't change, so you are insulated from rising interest rates. The down side is that if interest rates drop (as they have recently) you will not be able to take advantage of them until your fixed rate term expires, unless you are willing to pay and Early Repayment Adjustment or "break fee". these fees can be very significant and are discussed in more detail here.
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Nevada Rates, December 17th
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Refinance Rates
Purchase Rates
Nevada Rates, December 17th
Product: Today Last Week
Compare rates in your area:
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So, of the different types of Mortgage, which is right for me?
Well, that really depends on your personal situation and income. If you have a set income and like to budget well, fixed is a good way to go. If you have a commision based or variable income, floating may be more your style.
One important thing to remember is that you can have BOTH types of loan at once. It's possible to have part of your loan fixed and a part floating. This gives you the best of both worlds in many ways, but the proportions are important. Talk to your lender or broker about the advantages of a split facility. Keep your eye on the "no more mortgage" prize and choose from the best types of mortgage available to you that fits your income and circumstances. You should aim to be paying back as much as you reasonably can, without stretching yourself too thin. Slow and steady wins the race.
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