It can be confusing for people as to which home loan they should choose. This is understandable as each have different kinds of debt, interest rates and other policies to comprehend. Below is a detailed explanation of some of the most common home loans available.
Fixed rate home loan
A home loan with a fixed rate lets you enjoy a static interest rate which will not change during the duration of your mortgage. This is the most used plan provided by banks and credit groups. This loan lets you enjoy a fixed monthly fee to pay. This can give you an ease of mind in knowing you’re monthly expenses won’t increase because of the mortgage.
The only disadvantage you may have here is when interest rates go down. This period allows those with other house loan plans the benefits of reduced monthly fees. However, you can benefit from the period when interest rates are rising.
Your payment is mostly used to settle the interest of the loan during some of the first period of your mortgage. Once the interest is paid, the rest of your monthly expenses are used to cover the principal. You can discuss with your lender if you want to pay the principal first. You also have the option of increasing your payment in order to settle your debt faster.
Adjustable rate mortgages
Adjustable Rate Mortgage (ARM) loans are the opposite of fixed rate loans. However, most ARM loans provide a fixed rate during the last half of the mortgage period. Availing of this loan allows you to enjoy a very low initial rate of interest. For the first months or years, you may pay less each month in comparison to a fixed rate loan.
The disadvantage of taking an adjustable rate mortgage loan is the period when the rates are high. During this time, your monthly payments also increase. However, you can also enjoy the period when the rates are low. This is when your loan payment is lowered.
Balloon payment home loan
The balloon payment home loan is derived from the final payment of the mortgage. You only pay the total interest fee throughout the period of the loan. However, the entire principal owed must be payed right away at the end of the mortgage. The term “balloon” is based on the large fee being asked from you on the due date.
This loan is usually taken by individuals who believe they can get the finance to cover the “balloon” in the future. For those who are not able to pay the due date fee, they have the option to take another financial loan to cover the expensive principal. However, there are risks which can occur.
The balloon payment home loan should not be taken without fully considering your financial status. This plan is suitable for you if your salary is low, but you’re expecting a promotion or a raise in the future. The monthly fee of the balloon payment loan is much lower than other plan which is perfect for most people.
Everything mentioned above can help you clarify some of the common home loan plans. This will allow you to choose which is suitable for your financial status.
Taryn Jacob is a Senior Financial Advisor for over 2 years now. She’s a graduate of Banking and Finance at Melbourne Business School then later moved to Brisbane. Ventured to do journalistic practice, she currently writes for Heritage Bank specialising in home loans.