The Three Main Types of Mortgages

Basically, a home mortgage is an agreement you sign with a bank or lending intitution that says you will pay them a certain amount of interest on top of the purchase price over a certain period of time if they lend you the money. Your mortgage is secured against the property you will be purchasing so if you default, the bank will become the owner of the property.

You may be familiar with personal loans or the interest charged on your credit cards. The good news is that home mortgages generally offer a lower interest rate than credit cards or personal loans because of the longer period of time over which you will pay the off the loan and the interest. Your loan payments will usually be monthly, and the repayment terms could be anywhere from 10 to 30 years.

There are two major types of home loans in America now, with a third type becoming more popular in recent years. The first type of loan is the fixed home loan which allows you to borrow the money at a specified or fixed rate of interest for a specific numbers of years. Many borrowers sign up for this loan because in doing so they avoid the risk of having to incur extra expenses if home loan interest rates should fluctuate.

The second type of loan is the variable home loan which has a variable or changing rate of interest. Should the Reserve Bank determine that interest rates will move up or down in a particular quarter, then your lender has the freedom to also do so accordingly. If the rates are heading downwards it is ideal for borrowers. But should they begin to trend upwards this can spell danger for many people who live on a tight budget and already struggle to make their monthly repayments.

A third type of loan which is becoming more popular in America is the bad credit loan, known as the "low doc" loan. Low doc home mortgages are usually more expensive than traditional home mortgages, with higher fees and interest rates, but this is to offset the additional risk that the lenders must assume when lending money to people with poor credit. But, these low doc loans may be the only way that people with poor credit, no credit history, low incomes, or self-employed people can get a home mortgage.

But, no matter what type of credit you have, there is most likely a home mortgage that is available to you. So keep trying and get into your dream home now!

Apu Hypallathek is the owner and operator of Use Mortgage, a leading Internet directory for mortgage information.