The concept of a mortgage is one of the greatest expenses an individual or family can suffer. In the last decade, under the terrible effects of the usual economic crisis, mortgages have become a meager headache for masses. Making payments is a true utopia for many consumers.
There are various types of mortgage and each of them have particular characteristics and conditions, which make it difficult to be sure of selecting the best possible option as per personal needs of a consumer.
This article will reveal different types of mortgages, highlighting its prime characteristics.
Mortgage and Mortgage Loan: Differences
Mortgage and mortgage loan are not the same, although in “street language” they point to the same process.
The mortgage is a right of guarantee on immovable property. Once registered formally in the Property Registry, it has legal effects “erga omnes” i.e. it is linked to an obligation that is guaranteed. Only its cancellation can rid a person from paying.
On the other hand, the mortgage loan concept defines the obligation guaranteed by the mortgage. It is a loan of money made by a bank, some interests are assumed and due date of the same, the guarantee of its return is the mortgage on said properties.
First point to keep in mind: personal situation
Long before starting the rigorous path of selecting a mortgage, you have to reflect on the personal and financial situation. Banks demand certain economic conditions to start negotiating a mortgage. Among the various requirements of a bank, the most incontestable and non-negotiable are the following:
Net monthly income
Verifying a stable source of income is a priority. This income must be sufficient to take charge of the payment of the mortgages without problems. In technical terms, it is called the “repayment capacity” and should not exceed 30% or 40% of the income. Thus, a person who charges $ 1,500 per month, the minimum fee would be $ 450 and the maximum of $ 600.
Having a faultless credit is history and zero debts essential to show a healthy economic situation and provide the bank confidence in the ability to pay the mortgage.
To formalize a mortgage you must have savings of at least 35% of the value of the home, 20% of which the bank does not finance and the rest for the relevant initial mortgage costs. Do you meet all these requirements? Well, time has come to know what concepts and small print you have to take into account to choose the best mortgage that suits your interests.
What makes one mortgage better than another?
The answer is not simple, because what makes a mortgage offer more attractive than another is subject to certain concepts and conditions: interest rate, commissions, maturity dates and liabilities.
Classification of mortgages by interest rate
Among the concepts and conditions listed in the previous point, the interest rate is a determining factor both to classify the mortgages and the final amount of the installments. At present there are three types of interest that in turn define the classification of mortgages: fixed, variable and mixed.
Mortgage fixed interest
The installments of this mortgage are stable and are not subject to increase or decrease. Same amount is paid always, making the expenses manageable. An interest rate is set and it is not changed although (the variable interest rates are lower).
Variable interest mortgage
In this type of mortgages, the interest varies throughout the term of the loan. The following two indicators fix the interest rate on variable mortgages:
Reference index: Its value is determined from the supply and demand together with the intervention of certain European banks. It is a value that is published daily and varies according to certain economic conditions, both up and down.
Differential: It is a fixed percentage of the interest charged by the bank for lending the money.
One of the great advantages is to enjoy periods when a fee becomes lower by value of an interest rate after review. But there is a risk that a quota will increase in the case of increases.
Mortgage of mixed interest
This type of mortgages is a product that combines the characteristics of the other two options above. They usually apply a fixed interest in the first years between 5 to 20 years and the rest at a variable interest.
Review the existence of the zero clause
It is a clause that indicates that if the value of the interest rate approaches negative values, the loan interest becomes 0%, the client will only pay capital. It is not a customer friendly option, but a measure so that the bank does not have to return its customers for contributing negatively.
As long as the trend of interest rates is down, the variable interest mortgage is an optimal and more profitable solution. The stability in the payments and the volatility of the market will mark the decision of selecting a fixed-rate mortgage. On the other hand, a low-interest economic system is very satisfactory for consumers, but for banks, it reduces their benefits.