5 Types of Mortgages: How to Choose the Best Home Loan

5 Common Mortgage Types Home Buyers Should KnowFor most people, buying a home includes getting a mortgage. There are many mortgage types, and understanding them all can influence how to save for a down payment. Although there are some things in common with all types of home loans, people should keep these important distinctions in mind. Home buyers need to consider what they are hoping to get from the loan and their plans to pay it off. By considering these common mortgage types, buyers can decide what works best for their real estate goals.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Open Mortgage

Home buyers who need the maximum amount of flexibility in the loan may want to consider an open mortgage. Per the name, open mortgages have fewer limits in the loan. Buyers who want to make extra payments each year may prefer this type of mortgage because it usually does not carry penalties for early repayment. They are a good option for people who plan to sell quickly or pay off the loan well before maturity. Due to their flexibility, open mortgages typically have higher interest rates than closed mortgages.

Closed Mortgage

In comparison to an open mortgage, a closed mortgage offers more predictability. Closed mortgages often carry a fixed interest rate for the life of the loan. Homeowners know what to expect from the loan throughout the term, which is convenient for people with a predictable or fixed income. In exchange, borrowers have restrictions on their repayment of the loan. Many closed mortgages set limits on the number of additional prepayments borrowers can make each year. Applicants should read the terms of the loan to be sure, as some lenders do not have limits or penalties for prepaying these loans.

Convertible Mortgage

A convertible mortgage can be changed after an initial set term, usually six months or a year. Convertible mortgages generally have shorter terms, so borrowers can change the type of loan as needed. A borrower who wants to start with an open mortgage to make a larger payment in the first year may use a convertible mortgage to convert the loan into a closed mortgage at the end of the initial term. These loans are convenient for borrowers with circumstances that may change significantly within the first year and need the flexibility to adapt the loan to their situation.

Umbrella Mortgage

Although traditional mortgages are designed only to cover the cost of the purchase of the property, some loans may accommodate more. Umbrella mortgages, also known as wraparound loans, may provide access to different types of lending in one. For example, someone who wants to use the home to secure a car loan or other debt may apply for an umbrella mortgage to give them a single lender for all the debts. Homeowners may also use an umbrella mortgage to consolidate multiple mortgages on the same property. These loans tend to be more complicated because the borrower has to discharge all debts when selling the home.

Hybrid Mortgage

Some mortgages incorporate multiple elements of different mortgages into one. Hybrid mortgages may have different names, depending on the lender. These loans could encompass different loan types or interest rate structures at different points in the loan term, such as:

  • Open
  • Closed
  • Variable-rate
  • Capped-rate
  • Line-of-credit

The terms, rates, and payments may change over time for these types of loans. They are not the same as convertible mortgages because the options are typically laid out at the beginning of the loan. Applicants should be sure that they understand the terms before they decide.

Choose a Mortgage That Helps You Reach Your Goals

Settling on a mortgage depends on the borrower's needs and expectations. Some applicants need more flexibility, while others prefer the comfort of predictability over time. Understanding the details of these common mortgage types will make it easier for buyers to make an educated decision and ensure an easy move to a new home.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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