Luxury Home Buying 101: Mortgage Types

Buying a home is one of the most important decisions a person will ever make in their lifetime, and this decision gets to be even gravely serious when buying a luxury home. Therefore, it’s really important that home buyers know exactly how to purchase the property and… more – how they’re going to pay for it.

There’s a misconception going on that people planning to purchase luxury homes actually pay for them with cash. While there are some cash buyers, almost everyone else opts to pay for their house, through a loan or a mortgage.

Mortgage and their Types

Multiple options for loans are available for the prospective buyer. Deciding on the right option will vary; this will depend on the buyer’s needs and how much they can afford at the time and in the next few years to come.

Here are some popular mortgage options…

Fixed-rate Mortgage

This is the general way in paying for a home. With this, the mortgage rate will stay constant from the date the mortgage borrower and the lender agreed on up until the term ends. Borrowers usually choose the 30 year term but the borrower can choose to pay the principal amount plus interest in 5 to even 50 years.

When paying, the interest is paid out first, then the principal. For the first few years of the loan, most of the payments will go towards paying the principal.

The advantage in using fixed-rate mortgages is that they’re easier to plan for. Having enough money and a monthly budget to pay for the mortgage is quite important as the penalties in missing a payment are harsh. Generally, the interest rates are also higher when compared to adjustable rates but it’s also not affected by the interest rate in the real estate market, which goes both ways. The interest won’t go up if the interest rate rises, but it won’t go down either, although in some cases, the lender might allow the borrower to lower the rate.

Interest Only Mortgage

This mortgage is actually separated into 2 terms. In the first term, the borrowers pay the interest on the loan. In the second term, borrowers will start paying off the principal loan during the next 20 years or so.

At the start, the payments will usually be smaller compared to fixed-rate since you’re only paying the interest, freeing some money while paying for the loan. But unprepared borrowers can get overwhelmed when they finally have to start paying the higher principal amount. Because of this reason, lenders sometimes charge higher interest rates to cover their risks.

Variable-rate Mortgage

In this mortgage type, the lender assigns a starting interest rate for the loan. The rate is scheduled to rise on specified dates which the lender and borrower agreed on. The lender bases the interest rate from the house price index (HPI), which measures the current price of residential housing.

Borrowers can benefit from the currently lower interest rates, and they generally spend less in the long run. Payment is also very flexible; there are fewer penalties if the borrower decides to make a payment earlier or if they decide to change the term. Of course, the disadvantage is that it’s heavily affected by the housing index, which can make the price swing unexpectedly from affordable to expensive. This just might be a good idea to take when buying a luxury home especially while the current market prices are still low.

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