What exactly is a mortgage? A mortgage is basically a loan for either a home or apartment that is secured by property. In other words, the borrower enters into an arrangement with the bank where the borrower gets money upfront from them and then makes regular payments to the bank until he pays off the bank in full. This is also known as a secured loan because the borrower’s property is put up as security against the money in question. Usually the banks require the borrowers to own a considerable amount of equity so they are less likely to default on the mortgage.
Mortgages can be taken out either with a fixed rate of interest or variable interest rates. If you choose a fixed rate then for the term of the loan term you will effectively be locked into the interest rates. In this instance you would have a greater risk of defaulting on the loan because your rate of interest would remain more or less the same throughout the period.
Variable rate mortgages (ARM) allows the borrower to choose between fixed and variable payments depending on the Bank of England base rate at the time of taking out the loan. When the base rate rises then the monthly repayments can be affected but because they are not tied to an interest rate they can be more flexible. For instance in an emergency if you have sudden unexpected expenses such as bills or damage to your home then you can adjust your mortgage so that your monthly payments are lower than usual. You would then use this extra money to pay off the cost of the emergency.
To be able to take advantage of a lower interest rate, you would usually need to have equity in your home. To do this you could take out a home equity loan or use a second mortgage. You would then give the mortgage lender a promissory note. This is where you would agree to repay the loan when the full amount has been repaid. The lender is then in a position to take possession of your home after the agreed repayment period. If you do not keep up with repayments on the loan then the lender has the right to repossess your home.
Unsecured loans have no formal arrangement for the repayment of the loan balance. Borrowers who opt for this option are normally looking for lower interest rates on their mortgages. Borrowers should consider whether it will be possible for them to find a lump sum of money in the event of an emergency. Some lenders will agree to write off part of the loan balance if you offer to pay a higher amount towards the remaining balance.
Fixed rate or locked rate mortgages are the most traditional types of loan. These types of mortgages are known to offer regular repayments at a fixed rate of interest over the entire term. They are usually taken out by homeowners who have good credit scores. A fixed rate is also more secure, as the lender does not risk losing its invested capital if interest rates or inflation drop. Most borrowers prefer these types of mortgages, as they do not require monthly payments that may fluctuate due to factors beyond their control.