Mortgages are an excellent way to finance your dream house. Regardless of your finances, every individual with a steady monthly income can find the right type of mortgage to fit your need and help you get your dream house.
However, it is important to understand the different types of mortgages available in order to determine the best fit for you so you can start preparing to get the mortgage for your dream home. This article would be focusing on the classes of mortgages, the institutions that offer them, their rates, tenures and the type of mortgages available.
Classes of Mortgages
- The National Housing Funds by the Federal Mortgage Bank of Nigeria (FMBN)
- The Refinancing Funds Nigerian Mortgage Refinancing Company(NMRC)
- Commercial Bank Loans
The FMBN housing funds and the NMRC refinancing funds can be obtained from Primary Mortgage Institutions and Commercial Banks. These funds are suitable for civil servants and middle class.
The National Housing Funds loan amount is ₦15 million repayable over a maximum period of 30 years and an interest rate of 6% at a fixed rate while the Refinancing fund maximum loan amount is ₦50 million repayable over a maximum period of 20 years at a fixed interest rate. The equity contribution for the loan is 0% for facility of ₦5 million and below and at least 10% for facility between ₦5 million and ₦10 million. These funds have a lower interest rate and the period of repayment is for a long period of time.
With the Commercial bank loans, you can have access to a higher amount and a higher interest rate from 17% to 27%. Also, the equity contribution is at least a minimum of 20% of the cost of the property to be purchased and the repayment period is not as long as the funds discussed above. The commercial bank loans are suitable for persons or companies who require a large amount of money and who intend and can pay back in a shorter period. The maximum amount provided by the FMBN and the NMRC would be inadequate for such persons or companies.
Types of Mortgages
Most times mortgages differ based on interest rates and repayment structure. As a borrower it is very important to know and consider the advantages and disadvantages of each type before proceeding with the process.
The following are the different types of mortgages, their advantages and disadvantages:
Fixed Rate Mortgage
For this type of mortgage, the interest rate is set at the date you take out the loan and remains unchanged throughout the term of the loan irrespective of bank rates. These usually come in 10, 15 and 30 years e.g. the FMBN housing fund . Also, people who get fixed rate mortgage when the interest are high can refinance their mortgage when the rates goes down.
The biggest advantage is the predictability because the mortgagee knows the period in which the interest and principal will be for since the rate agreed upon at the beginning will remain unchanged throughout the life of the mortgage. The borrower is protected from sudden and potentially significant increase in monthly mortgage payments if increase rates increases. This enables the borrower budget properly.
The disadvantages of this type of mortgage are:
- Since the rates are fixed, the interest rates are usually higher than other types of mortgages.
- There are limits on how much you can lift repayments or make large sum payments without you being charge.
- The rates cannot be adjusted irrespective of whether the rates have reduced.
Floating or Variable Mortgages
Otherwise known as Adjustable Rate Mortgage (ARM). Lenders can adjust the interest rate from time to time in line with the agreed index at the commencement of the loan.
This type of mortgage, repayment may go up or down depending on change in interests in the wider market.
The advantages of this mortgage are:
- The monthly rate is usually much lower than the fixed rate in the short term. However, can increase during the term of the mortgage.
- Once the rate begins to adjust and is lower than it was when a buyer purchases the home, they will be able to take advantage of the lower rate.
- There is privilege of making changes without any consequence.
The disadvantages of this mortgage:
- Unlike the fixed rate, it is not predictable as rates are not fixed and can increase.
- A drawback is the prepayment penalties. It is important to find out whether there are pre-payment penalties for the ARM you will be obtaining.
This type of mortgage operates like the fixed mortgage rate only that the monthly payments are lower because of a lump payment at the end of the loan. Here, what is being paid monthly is the interest rate. The Balloon mortgage has a shorter term unlike the other mortgage types.
The advantages of this mortgage are:
- It has a low-down payment. Here, the borrower’s monthly payments don’t fully amortize the loan at the end of the period, with payments starting low but ballooning to a much larger amount at the end of the term. They’re good for people who expect to have a higher income at the end of the borrowing period than when they started, or who expect to sell their home before the loan period ends.
- The interest rates applicable to balloon loans are comparable to that of a regular fixed-rate mortgage, notwithstanding the fact that balloon loans have shorter payment terms. Since a balloon home mortgage matures within 5 to 7 years, many lenders consider it as low risk.
- The remaining balances can be refinanced if the borrowers are unable to fully pay their remaining balances at the end of the mortgage term. However, the rates that the lender will use on the refinanced mortgage will be the prevailing market interest rates. This means that the mortgagee could face a higher rate compared to the one used on the original balloon loan .
Disadvantages of this mortgage are:
- The payment of a lump sum upon maturity of the mortgage.
- The risk of not qualifying for refinancing of the mortgage can lead to foreclosure.
In conclusion, when deciding which type to go for it is extremely important to reach out to an expert to analyze the advantages and disadvantages before deciding on a mortgage type.