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Making Sense of Different Mortgages

Dec 12, 2007
Let me ask you a question: When you think of mortgage, what are the first ideas that come to your mind? If you ask two people that question, you could quite happily end up with two different answers, simply because there are actually a good number of types of mortgage loans out there. It is incredible how different people come up with such varying explanations for the same thing.

How can we best go about classifying these various mortgage loans? I am sure there is a way to do this. The important word, really, is "loan". A lot of people just casually drop the word in everyday use, but that's effectively what it is. The "mortgage" part means, for the context we're looking at, that the money they loan to you has a pretty large catch attached to it: if you don't pay up, they get your house. If you ask me, you can't put it more simplistically. The fact is that if you want to secure a mortgage, you are in effect, putting your house at risk.

When you have decided to go in for a mortgage, shopping around is essential. It is not all that different from looking for a regular loan. The sorts available vary from legal system to legal system (so basically country to country), but in the long run they all boil down to you having to pay back the amount you borrowed over a long period of time with some interest.

Interest rates are always in flux, but they won't be if you get a fixed rate mortgage. This means that you don't have to worry about the interest changing from month to month. So you won't suddenly find yourself unable to afford the repayments. Alternatively you could try an "adjustable rate" mortgage (which has the interest rate change over time). Some lenders provide a combination of both. The actual rate itself can vary, but that's generally just based on what creditor you go with (which in turn can be affected by your credit history).

One aspect that can definitely change between mortgage types is how and when you're expected to repay it. The "capital", or amount you were initially given, clearly has to be paid back to the creditor at some point, but some types of mortgage loan such as "lifetime mortgages" (sometimes called "equity release") don't have to be paid back until you die. What happens here is that your house is as good as sold to the lender. However, you continue to live there till you die. Then the creditor acquires it completely.

This kind of a loan targets retired homeowners. You have to be a certain age to avail of it. And it's unlikely that you'll end up with the same value of loan as you would if you actually did sell your house. But it does have the added benefit of giving retired home owners the chance to live in their own home in relative comfort for the rest of their lives.

So: interest rates and variability, how and when it has to be repaid (not to mention the legal aspects of the whole loan) are all ways in which mortgages can vary. Try explaining your mortgage to someone. This may not seem too difficult at first glance. But just try it sometime and see. It is a fairly tricky thing to do.
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