3 types of mortgage and how they impact borrowers’ finances

Everyone wants a home. They all want to get the burden of annual or monthly rent off their bill and realise their homeownership dreams.

Except someone comes upon a huge cash windfall, earns more than the average income-earner or he is a successful businessperson, he needs to plan extensively and weigh all his options before embarking on a housing project.

Funding a home is not an easy feat and most individuals require debt instruments to execute such projects in good time. The most common instrument among these is mortgage which guarantees the borrower a sum of money to make the real estate purchase and the debt is serviced over a period of time.

In return, the property is pledged to the lender who reserves the right to foreclose the asset in the event of a failure of the borrower to fulfill the contractual agreement.

Notwithstanding this point, which might appear like a downside, mortgage is largely favoured by real estate investors due to the large funds it affords and its long-term repayment flexibility. These are two things personal loans, on the other hand, do not guarantee.

Even though mortgage has its fair share of pros and cons, there are salient facts about it that prospective lenders must know before utilising this option and like every kind of loan, extensive consideration must be paid to the interest. To further improve one’s understanding of the subject matter, more light has to be shed on the popular mortgage types below:

Fixed-rate/traditional mortgage: This type of mortgage guarantees that the borrower pays a fixed rate over a certain period; which could be short-term, mid-term or long-term. This mortgage is insusceptible to the fluctuations of the money market nor the oscillation of inflation.

If, for instance, one gets a 30-year fixed-rate mortgage in 2020 at 6 percent, he will keep repaying it at that same rate until completion in 2050. Regardless of market interest rates, the mortgage rate  does not change.

Adjusted-rate mortgage (ARM):  Here, the lender pays the mortgage at a fixed rate for a predetermined time and upon the termination of that time, the rate reverses to the prevailing  market interest rates. Simply put, under these terms, a 10-year loan obtained in 2020 will be repaid at a fixed-rate for a time, say 5, before the adjusted-rate terms kick in and it becomes subject to the going market interest rate.

Read also: What to know about equity contribution for residential mortgage

This type of mortgage is generally not considered the best because a borrower may end up paying double the loan amount based on the stability, or lack thereof, of the money market in the country. Generally, the initial rate of an ARM is often lower than a fixed-rate mortgage because chances are that it will surpass it on the long run. It also has less stringent qualification criteria.

Interest-only mortgage: Least popular of the three and commonly avoided, is the interest-only mortgages. They are often structured in two parts: the first where the borrower pays the interest on the mortgage alone and the second where he pays both the principal (amount loaned) and interest at a variable rate that could be as high as three times the amount borrowed.

For instance, a 30-year interest-only mortgage at 10 percent rate begins with the borrower paying only the interest for a certain time, say 10years , before the switch to the repayment of both principal and variable interest.

“Do you know that you can access guaranteed mortgage of up to ₦15million when you buy any of our homes at Green Park Homes? With a fixed interest rate of 6 percent, payable over up to 25 years, you too can begin your homeownership journey today,” Lanre Awode, property analyst at Alpha Mead Group, said.