A mortgage loan is a loan from a financial institution guaranteed by a property as the collateral.  Because few people have the financial means to directly purchase a home, this provides them with the ability to own residential or commercial property.  The return for the banks is found in the interest and fees they receive from the borrower.  Typically loans have an interest rate and an amortization schedule over a set upon period of time.  There are different pros and cons of mortgages though, depending on what type of mortgage you get.

Pros and Cons of Fixed Rate Mortgages

With a fixed rate mortgage, you are given an interest payment that remains constant despite market changes.  Fixed rate mortgages can amortize over a period of time for up to 40 years.  The benefits of a fixed rate mortgage are predictable payments, lower interest rates and smaller payments.   The negatives are that the consumer does not benefit as the market rises and frequently interest rates are high.  Because of this they may need to refinance at some point during the mortgage.  There is also no debt reduction during the amortization process and more payments per year.

Pros and Cons of Adjustable Rate Mortgages

An adjustable rate mortgage has payments that decline as the market rates decrease.  They generally have a lower rate initially than fixed rate mortgages and you can lock in these rates when applying for the loan.  They also start with lower monthly payments.  However, the payments can also increase as mortgage rates rise.  Borrowers must also pay a fee to lock in the rates because adjustable rate mortgages rates are unstable since predicting the future interest rate increments can be risky.

Pros and Cons of Reverse Mortgages

Reverse mortgages are only used if the borrower is over 62 years old, owns the home and it is the primary residence.  Eligibility depends on age, interest rates and the value of the home.  This type of loan is a financial tool to help retired seniors stay in their homes and increase their income during their retirement years. Each month they receive a payment or it can be set up so that they receive a lump sum. The downside of reverse mortgages is that they have high closing costs that the owner is liable for.  It may also affect any Medicaid, state or federal programs they are using.

Factors to Consider When Choosing a Mortgage

The most important factor to consider when choosing a mortgage is if you meet the criteria for the mortgage you are interested in.  Decide how long you plan to stay in the home, the loan costs and the length of the mortgage.  If the home is a short-term purchase, an adjustable rate mortgage will be the better solution.  The problem with this is that if for some reason the house needs to be kept for a longer period of time, the payments will continue to rise if the market rates increase.  A shorter loan term can also be a better option, as the equity in the house builds faster.  However, the payments will be higher and if something happens that affects income, it could affect the ability to pay the mortgage.

Building equity in a home with a mortgage is almost always a sound investment though if the mortgage is kept under 70 percent loan to value.  With the pros and cons of mortgage lending though, it is important to choose the right mortgage plan.  Research any mortgage companies and watch for predatory lending practices.  Government regulations are making it harder for predatory lending companies, but they still exist.  Because banks have tightened lending requirements, also make sure that credit ratings stay high to avoid any unnecessary complications.