How To Choose The Right Type Of Mortgage

How To Choose The Right Type Of Mortgage

A house is an important investment in your lifetime. Besides meeting your basic need of providing shelter, it can also provide you a source of cash if you have no other source of income. A loan taken to purchase a house is called a mortgage. The most common types of mortgages are capital repayment mortgages, endowment mortgages, pension linked mortgages and interest-only mortgages. But the mortgage bucking the normal trend is called a reverse mortgage. You get the mortgage from the financial institution for giving up certain part equity in your home. Given below are some points about various mortgages.

How To Choose The Right Type Of Mortgage

What is a reverse mortgage?

A reverse mortgage, or an equity mortgage, is a loan given to seniors to allow them to convert the equity of their home into cash. The best part is that you own the house even while converting the house into cash. To apply for reverse mortgage, you should be older than 62 years old.

Should I go for capital repayment mortgage or low-cost endowment mortgage?

A capital repayment mortgage is the better option than low-cost endowment mortgage. Though the monthly outgoings for both the types are more or less the same, capital repayment mortgages offer better flexibility if you have any financial problems and want to restructure your finances. Besides, inflation will erode the value of profits derived from an endowment policy.

How does a pension linked mortgage work?

A pension linked mortgage works in the same way as an endowment mortgage and reverse mortgage. You have to make two payments each month. One payment pays off the interest on your loan. The other payment is meant for your monthly insurance premium that pays off your loan when the term expires.

The remaining amount pays your pension when you retire. When you retire, you can convert some portion of the pension into a lump sum that can be used to pay off the mortgage. While opting for this type of mortgage, you should remember that it is more expensive than the endowment mortgage. Also, since you are using the part of pension to pay off the mortgage, you will be left with a small amount as your pension.

What is an interest-only mortgage?

In an interest-only mortgage, you pay only the interest on the loan and are appropriate for people who are nearing or have entered retirement age, as it is difficult for them to opt for a mortgage of longer duration.