An equity mortgage is the most commonly found loan taken on a house. Many financial institutions and banks offer this kind of loan to home owners.

There are two main components of this loan from the borrower’s perspective – the principal and the interest. The principal is the actual lump sum amount that is needed to fund the borrower’s expense. The interest is the amount charged by the lender for use of his funds. The interest is charged as a percentage of the principal and is required to be paid periodically, typically every month.

Different rates of interest

You can opt for an equity mortgage with a fixed or variable interest rate. Both have their own advantages and disadvantages and with a little research and study of economic conditions, you can opt for the right kind of interest rate for your loan.

Fixed rate mortgage

This equity mortgage comes with a specified fixed interest amount that is required to be paid every month. This amount is fixed at the time of loan initiation and it remains unchanged until the loan ends. This kind of fixed rate loan lets you predict exactly how much you will need to set aside every month towards your mortgage payments. In the event of an increase in interest rates in future, you are insulated against a hike in your recurring expenses by the fixed rate.

Adjustable rate mortgage

An adjustable rate for your mortgage means that the rate of interest you pay changes in line with market rates. Your monthly payments may be unpredictable with this kind of interest rate but if rates are set to fall at the time when you take your mortgage, the adjustable rate may lower future payments significantly. Usually, an adjustable rate mortgage comes with an initial fixed interest period during which the rate cannot be changed.

Closed end and open end loans

Equity mortgages may also be categorized as open ended and closed ended. The difference lies primarily in the way and the time at which the loan funds are disbursed to you.

– Closed ended loan – A closed ended mortgage is one where the loan amount is given to you as soon as your application is approved, that is, at the beginning of the loan term. The interest payable is calculated on the entire loan amount and it has to be paid on schedule right from the time you receive the funds.

– Open ended loan – An open ended loan is one where the amount of loan approved is made available to you during the entire loan term. However, you are not required to take the entire sum at the start of the loan. You can make withdrawals from this credit line as and when you require the funds. These loans are also called home equity lines of credit. The advantage of this kind of equity mortgage is that you can restrict your interest payments to the funds you actually withdraw instead of paying for the entire loan amount.

Author Bio: For more information on equity mortgages or a second mortgage Ottawa, visit http://www.canadianmortgagesinc.ca/

Category: Real Estate
Keywords: equity mortgage, loans, second mortgage, finance, real estate