Let us take a look at the distinguishing features and huge benefits of a traditional mortgage as compared to the various other types of mortgages available on the market. The purpose of a mortgage loan is to facilitate the purchase of a very expensive asset, usually properties and houses.
A traditional mortgage has the following primary distinguishing characteristics:
- Fixed interest rate
- Long duration or tenure of at least fifteen to twenty years
- Significant down payment requirement
- High closing costs
The most important characteristic of a traditional mortgage is the fixed interest rate. It follows the simple ‘low risk, low profit’ principle. Your interest rate remains fixed throughout the tenure of the loan and this means that you can anticipate your monthly repayment and can plan ahead for it.
The interest rate is not linked to any index or benchmark. There are no set points beyond which the interest rate will automatically vary and be adjusted. This variation is one of the primary characteristics of adjustable rate mortgage.
A traditional mortgage does not allow you to enjoy the advantages of a low interest rate regime. However, it protects you from a high interest rate regime. If you opt for an 8% 20 year mortgage loan worth $100,000, you will be paying interest at 8% percent for the entire tenure of the loan. It does not matter whether the interest rate prevalent in the market is 6% or 10%. Your payment shall remain the same, thus the risk of foreclosure is highly lower.
Just as this traditional mortgage option is not very profitable for the borrowers, it is not very profitable for the lenders either. This is one of the main reasons for which lenders insist on a high down payment of at least 15 – 20% of the loan amount. This means that lenders shall not offer more than 85% of the value of the property. In fact, lenders of traditional mortgage insist on the down payment and proof of receipt before releasing any funds.
When going for a traditional mortgage, you should analyze your income capacity, your financial condition,credit score,fico score percentage, and conclude whether you can take the risk of going in for a loan where the interest rate varies on a regular basis.
The terms and conditions of these loans are devised in such a manner that the increase in the interest rate is computed on a retrospective basis. This often results in a scenario where the borrower is required to deposit tens of thousands of dollars in a single month due to the interest calculation. You will never face this problem as far as traditional mortgages are concerned.
If your finances have the capacity to absorb the volatility, you should go in for an adjustable rate mortgage loan. Otherwise, it’s recommended to stick to the traditional mortgage loan where you are assured of safety of your investment and stability in your financial planning. This way you will avoid a possible foreclosure and you will make sure you’ll make a sure investment and keep your property forever.