Some people don't know that there are different ways to pay back a mortgage, whether it's their first, second, or a refinance. This is true for all types of mortgages. So, before you just go with whatever is written on the papers, you should think about the following:
Money paid for capital and interest
This is the most common way to pay off a mortgage, since each month you make payments on the loan's capital, or principle. This is called amortisation in the U.S. and a repayment mortgage in the U.K. The length of these loans can be anywhere from 10 to 50 years, depending on the lender and where you live. When you pay your mortgage each month, a portion of your payment goes toward interest and the rest goes toward the loan's principal. Most of the payment goes toward the interest at the beginning of the loan, and most of it goes toward the principal at the end.
Only the interest is paid back.
In the US, this type of mortgage is not very common, but it is in the UK. Basically, with this type of mortgage, you don't pay back the capital over the course of the loan. Instead, you make regular "payments" to an investment account or plan, which helps you build up a large lump sum that will pay off the mortgage in full at the end of the loan. This is usually called a "investment-backed mortgage" or one of the following types of mortgages: "Personal Equity Plan Mortgage," "Individual Savings Account Mortgage," or "pension mortgage." So, when a mortgage broker uses any of these terms, you'll know what they mean. There are great tax benefits to these kinds of mortgages, so ask your mortgage broker about them.
No interest or capital payments.
If you are older, this could be the right way to go. Some mortgage companies offer a loan that is usually called a "reverse mortgage," "lifetime mortgage," or "equity release mortgage," depending on where you live and where the mortgage company is located. Basically, this type of mortgage just adds up the interest and the principal each year. The only problem is that each year that the mortgage is open, the debt goes up. One reason why these loans are for older people is that the borrowers usually don't have to pay them back until they die.
There are also a few other, less common ways to pay off your mortgage. Before you sign your mortgage papers, you should check with your lender to see what kinds of payment plans and options they offer. You might be able to get a better payment plan if you choose a way to pay that isn't the norm.
