A mortgage is the security on a loan, in almost all cases a loan to buy real estate. Basically, the bank buys the piece of real estate and the buyer pays back the sum gradually over many years with a certain amount of interest accruing to the principle. In addition, a down payment of a certain percentage of the total price of the property is paid at the time of the real estate transaction. There several common varieties of mortgages usually offered by banks and other financial institutions that finance the purchase of property by private citizens.
First, one should understand the difference between open and closed mortgages. A closed mortgage has a set term for the money to be paid back. This type of mortgage is for people who know they will not be paying the mortgage back any faster than the term set in the mortgage agreement. Since most closed mortgages charge prepayment penalties if you pay back your debt faster and thus save yourself interest payments, a closed mortgage could be a disadvantage if one suddenly finds oneself in better financial condition.
An open mortgage has no prepayment penalties, so it may therefore be better for people with a high income, because this kind of mortgage allows one to pay off the mortgage as fast as it can possibly be paid. These types of mortgages often have higher interest rates as it assumes that the principle sum will be paid at an above average rate, and the lender therefore wants to make money off the debt while it still exists. The whole aim of open term mortgages is to pay as little interest a possible over the course of the debt term.
The next set of options commonly offered by big banks are fixed mortgages or variable mortgages. A fixed rate mortgage is a mortgage loan where the interest rate remains the same through the term of the loan, as opposed to loans where the interest rate may change. This is a good option for home buyers who want their mortgage payment to stay the same each month. Variable rate mortgages change with the market, either saving the buyer money if the market rate is low, or costing the buyer if the market rate is higher than normal.
Some banks offer mortgages that combine the approaches, such as convertible term mortgages that act like an open mortgage until you decide what the term will be and close it. Or there are mortgages that have a fixed and variable portion of the loan so you can get the best of both worlds. Other types of mortgages include interest only mortgages, graduated payment mortgages, adjustable rate mortgages, negative amortization mortgages, and balloon payment mortgages.
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