Thursday, December 27, 2007

Discounted Mortgage What Is It?

By Chris Clare

With so many different types of home mortgages currently on the market, it can be hard for possible homeowners to decide which mortgage is best for them. Whether an individual is looking to refinance or take out their first mortgage, lending companies have a number of different mortgage options available to fit almost anyone's needs.

One type of mortgage that is offered to those looking to purchase their first home is a discount rate mortgage, where borrowers are offered a reduced interest rate on their loan for a set period of time. The interest rate typically stays reduced for a period of about one to three years, depending greatly on what the borrower would like to do.

Put simply the borrower is getting a reduction in their rate and therefore their payments for a set period of time and as such they will save money against the standard variable rate. That said once the discount period ends the mortgage will revert back to the lenders standard variable rate. One of the drawbacks is that due to the fact that the mortgage is a discount from the variable rate if mortgage rates do rise then the discounted mortgage will also rise at the same rate. However the same is said if the mortgage rates drop the discounted mortgage will also fall.

It is always an option to refinance in the future as quite a lot of people do. But you should consider any fees your lender may charge you to leave such as penalties on ending the mortgage early. That said if you have gone through the discount period in full you should be OK as not many lenders charge beyond their rate periods, but it is always important to check your products terms and conditions before you sign up to ensure you don't have this sort of unacceptable tie-in. A lot of people do re-mortgage to get a further reduction in rate once their original reduction has ended and therefore benefit from a further reduction in costs.

Discounted mortgages are most attractive to young first time buyers as the reduction in costs in the early years is of greatest benefit to them. However a lot of people can end up with a mortgage loan that may be unaffordable in the future due to the way the true cost is manipulated down in the early years.

Many people who have sorted out this type of deal have found themselves in a bit of trouble in the future due to the rising rates which they may not have been expecting. Furthermore a re-mortgage might not be an option as times change and they may not be able to qualify for a new mortgage company in the future, and their affordability may also be different in the future due to a change in circumstances.

Discounted rate mortgages are ideal for those who are looking to buy a home, and need extra money to make improvement to the home or for other needs. Even though the interest fees and mortgage payments will be low during the discounted period, a loan like this should only be considered when the applicant is able to afford a typical mortgage but may need extra money for a set period of time.

When applying for a discounted rate mortgage, it is always important to know how much the mortgage payment will be after the introductory period has ended, and be able to afford the higher payments right off the bat. Hoping that you will get a raise or better job once the discount period has ended is not enough when applying for a discounted rate mortgage, because if you cannot afford the higher payments you can lose your home. Discounted rate mortgages are a great option for many looking to buy a home, but it is not the best option for everybody.

Everyone wants to save money and not least on their mortgage payments as they are paid every month for years. But you should always think hard before taking any mortgage not least a discount mortgage as the wrong mortgage choice can cost thousands over time and even cost you your home. So make sure you have all the information to make the right choice and ensure you deal with an independent mortgage advisor for your mortgage advice.

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