With the real estate market being so hot for the past five years, mortgages have become more flexible and come in many forms. Different home loans can be hard to understand, so let's look at the most common ways to pay them back.
How to Pay Off Your Mortgage: The Basics
There are so many different kinds of mortgage home loans that it's hard to know where to start. One way to get a better idea of what's going on is to think about how you have to pay back the loan. If you do this, you can get a better idea of how much it will really cost you and if you can really meet the obligation.
The most common and traditional way to pay off a mortgage is to pay both the principal and the interest over time. The 30-year mortgage loan with a fixed interest rate has been the simplest of these types of loans. Most of the time, you make a payment every month. Part of that payment goes toward paying down the loan's principal, and the rest goes toward paying interest. At the beginning of a loan, only a small amount goes toward the principal debt. As the years go by, it will get bigger.
There are many different kinds of mortgages that focus on interest payments. Even though they have different names, the main goal of these games is to avoid paying back the principal. When you make monthly payments, the whole amount goes only toward the loan's interest. The payments are never put toward paying off the loan. The good thing about these loans is that you can often get a slightly bigger loan, and your monthly payment is much lower. But keep in mind that this loan only makes sense in the long run if the home goes up in value a lot. If it doesn't, you won't make very much money.
A balloon loan is a common but risky type of loan. A balloon loan combines the interest-only option from the last sentence with a call on the loan's principal. In real life, you might get a loan for a set amount of time, like five years. During the five years, you pay only the interest each month. At the end of the five years, however, the full amount of the loan is due. This call can be avoided by selling or refinancing the home when the loan comes due. The loan may not have gone up in value, which could be a problem. If it hasn't, you might be stuck with a bad deal or even lose the property.
At the end of the day, it's not that hard to figure out how modern mortgage home loans work. The important thing is to know how much you have to pay back, how it will be used, and for how many years.
