As with any loan, take your time in deciding about what mortgage to take out and make sure you can afford the repayments. Never agree to a mortgage or financial commitment, no matter how tempting, if it falls out of your range of financial comfort. Key points to take into consideration when taking out a mortgage may include:

• Type of down payment you make
• Amount of time to pay the loan back, also known as the loan term
• How long you plan to stay in the space
• And the interest rate you can afford to pay

There is a wide variety of mortgage types which differ substantially between the different types as well as between the different lenders.

There are two basic ways that mortgage lenders charge the borrower for using their money – (1) through interest charges you pay each month over the life of the loan, and (2) points.

Points are an upfront fee based on a percentage of the loan. One point represents 1% of the mortgage. For example, for a $150,000 mortgage, one point would be $1,500, or 1% of the mortgage; two points represents 2% of the mortgage, or $3,000; and so on.
These points can be paid as part of closing costs, or the lender will reduce the available loan proceeds by the amount of the points. Some loans will not charge points, but will have a higher interest rate.

When reviewing different mortgage products, compare their interest rates, points’ amounts and other fees to get a clearer picture of how much you will pay.

Below is some helpful information on the most common types of mortgages that are on offer from a financial lender. Always keep in mind that these mortgages are almost always negotiable, especially if you have pulling power with good credit and a large down payment.

How Mortgages are Approved

There are several factors involved in the loan approval process of your mortgage application.

Income

When you’re qualifying for a loan, lenders usually use your gross income (all the money you earn before taxes) to determine the monthly mortgage payment you can afford. Gross income may also include the average of overtime pay and commissions, and child support or alimony, if you wish to have them considered.

Percentage of Income

Your monthly mortgage payment is calculated as a percentage of your income. That is, lenders require that your total monthly mortgage payment — principal, interest, property taxes, mortgage insurance, hazard insurance and any homeowner association dues — be no more than 28% to 33% of your monthly gross income.

Total Debt

The borrower may have car loans, student loans, credit cards, child support, alimony or other monthly expenses. In general, lenders require that the total of all your monthly expenses (excluding basics like utilities and groceries) not exceed 38% of your gross monthly income.

Credit History

A satisfactory record of paying your bills on time is an important part of getting a home loan. If you have had credit difficulties within the past two years, a good explanation of any late or missing payments on your credit report will be taken into consideration.

Employment History

Lenders usually prefer to lend money to people whose incomes have grown steadily over the past several years and who have worked consistently in the same or related occupations. You will need to verify employment. If you’re self-employed, work on commission or have been at your job less than two years, you may need to provide additional information about your work history.

Property Appraisal

A professional appraisal is done to determine the value of the home. An appraisal is based on the home’s condition and selling prices of comparable properties in the area and confirms that the property is worth the purchase price you are offering for the home.

TYPE OF MORTGAGE	Fixed Rate Mortgage
DESCRIPTION	Like the name implies, a Fixed Rate Mortgage maintains the same interest rate throughout the entire life of the loan. You can get this fixed rate mortgage usually in 10, 15, or 30 year terms and the time can be negotiable with your specific lender to fit your needs. For residential properties, loans are readily available in 15 and 30-year terms. Loans for commercial spaces usually do not exceed 15-year terms; five- and 10-year terms are most common.
ADVANTAGES	- Fixed Monthly payments – This type of mortgage is good for the home buyer who wishes to know how much the house payment will be every month – Allows more precise budgeting even in times of economic uncertainty – Repayments are not affected by interest rate rises
DISADVANTAGES	- Repayments do not fall if rates fall – Allows only limited additional payments – Penalties for early payout of the loan

TYPE OF MORTGAGE	Variable Rate Mortgage or Adjustable Rate Mortgage (ARM)
DESCRIPTION	The rate charged on a variable loan moves up or down in accordance with movements in interest rates as set by the Reserve Bank.
ADVANTAGES	- Repayments fall when official interest rates fall – Offers flexibility and additional features, such as the ability to make additional payments as well as a redraw facility which allows one to take out any extra money that one has put in – Allows careful borrowers to pay off the mortgage quickly by not having any penalty for advance payouts
DISADVANTAGES	- Repayments rise when official interest rates rise – Higher interest rate than a basic loan is charged as variable loans usually offer additional features

TYPE OF MORTGAGE	Split Rate Mortgage or Hybrid ARM
DESCRIPTION	A split rate mortgage has one portion of the loan fixed and one portion variable and the lender can select how much to allocate to each provided it meets lenders policy.
ADVANTAGES	- Fixing portion of your loan can protect you against future interest rate rises – Provides more certainty in budgeting than full variable mortgages – A lender can make additional payments on the variable portion of the mortgage – Enables you to have a fully featured home loan by combining multiple splits together
DISADVANTAGES	- Leaving part of your loan at a variable interest rate allows you to benefit with a lower rate if interest rate falls – Allows limited additional payments only

TYPE OF MORTGAGE	Interest-Only Mortgage
DESCRIPTION	An interest-only mortgage is where the borrower initially only pays back the interest on the mortgage and the capital is not paid back until the end of the mortgage term. The idea of this mortgage is to pay the interest owed to the lender and save the capital repayments by investing them elsewhere. This makes it possible for the lender to save by investing capital that would otherwise be paid straight back to the mortgage lender. At the end of the interest only period – usually one to five years – the borrower must start making Principal and Interest Repayments over the remaining term of the loan.
ADVANTAGES	- Lower repayments initially as only the interest needs to be repaid and so you have more money to renovate/improve the property. – Cuts the cost of buying a residential investment property in the short-term, which could allow you to make greater contributions to your principal place of residence.
DISADVANTAGES	- There will be sudden increase in repayments at the end of the Interest Only period when the loan converts to Principal and Interest repayments. – Lenders will assess your ability to repay the loan only on the principal and interest repayments. This can reduce your borrowing power, as these repayments will be higher than a loan on Principal and Interest for the full term.

TYPE OF MORTGAGE	Introductory Mortgage
DESCRIPTION	The interest rate is usually low to attract borrowers and this is also known as a ‘honeymoon rate’. This rate generally lasts only for around 12 months before it rises. Rates can be fixed or capped and most of these mortgages revert to the standard rates at the end of the honeymoon period.
ADVANTAGES	- This type of mortgage usually offers the lowest available rates – When payments are made at the introductory rate, the principal can be reduced quickly – Some lenders provide an offset account against these loans
DISADVANTAGES	- Repayments usually increase after the introductory period

TYPE OF MORTGAGE	Two Step Mortgage – 10/1 Year Adjustable Rate Mortgage (ARM)
DESCRIPTION	With this mortgage, the interest rate remains the same for 10 years and then starting the 11th year changes every year according to the index the lender chooses to base the interest on.
ADVANTAGES	- This mortgage is good for those who may move in 10 years and want to enjoy a stable payment plan while they are living in the home.
DISADVANTAGES	- Repayments usually increase after the 10 year period has passed

TYPE OF MORTGAGE	Balloon Mortgage
DESCRIPTION	A balloon mortgage works like a fixed-rate mortgage, except for a much shorter term, with lower monthly payments, and a large “balloon payment” at the end of the loan’s term. Taking on a balloon mortgage can be a risky proposition as it assumes that you will sell or refinance your property in terms that allow you to cover the balloon payment.
ADVANTAGES	- For disciplined borrowers that intend to sell the home or refinance before the balloon payment is due, this loan is beneficial as it allows the borrower to get more home for their money since the monthly payments are lower than a typical fixed-rate mortgage.
DISADVANTAGES	- Homeowners that cannot afford the balloon payment can run into trouble, especially if the loan requires them to refinance the payment through the original lender. This refinance is often at rates higher than from another lender.