Purchasing a home can be one of the biggest and most significant investments you make in life. While ideally, you need to save up money before buying a home, you’d most likely end up doing so during your retirement.
Most of the time, starting a family involves having a reliable roof over your head to live and see your family grow through the years, and your home purchase cannot wait until you get old.
Thus, most home buyers turn to a mortgage as an option for getting a new home now while gradually paying off the loan. However, before choosing this option, you have to know how the mortgage process works, your available mortgage options, and how much you can afford to borrow.
What is a Mortgage?
A mortgage is a secure loan from a bank, lender, or financial institution that allows you to buy property or land. Being ‘secure’ means the bank or lending institution owns part of your home until the mortgage is fully repaid. Mortgages typically have a 25-year term, but this can be shortened or extended, depending on your arrangement.
Knowing how much you can borrow, the amount you can deposit as a down payment, and how much you will pay monthly can help you reach a favorable arrangement with your mortgage provider.
While the lender often makes the mortgage calculations, having an amortisation calculator for yourself can help you project a reasonable loanable amount and repayment option. It empowers you to negotiate the mortgage and repayment terms and reach a favorable arrangement.
A typical mortgage scenario would be the borrower depositing 10% of the property value. If the house costs $200,000, you’ll need to pay $20,000 as a deposit. The lender will grant you the remaining 90% ($180,000) of the purchase price. It is called your loan-to-value or LTV.
Essentially, the higher the amount you deposit, the lower your interest rate and the more favorable your repayment terms. If you can manage to deposit up to 40% of the property value, you can easily lower your interest rate and pay your monthly amortization. To plan accordingly is a way to save money for a house on a low income. Also, the rate savings are magnified if you’re mortgaging a house worth fix figure or seven figures.
Finding and Getting a Mortgage
Understanding the concept of LTV and knowing how to calculate your mortgage can help you prepare for the possible mortgage options. First, you need to find a bank or financial institution where you can discuss your mortgage options. You can visit more than one financial company while you try to find a mortgage.
To further expand your available mortgage providers, you can hire the services of a mortgage broker or independent financial adviser to give you current rate comparisons. Brokers and financial advisers provide you invaluable information to help you navigate the mortgage market and find the best deal for a property.
It’s also possible to get a mortgage on your own through an execution-only mortgage. However, this route entails that you know the type of mortgage you want, the property you will buy, the amount you want to borrow, the repayment term, and the type and rate of interest. It can be quite risky if you have insufficient information. But if you are confident in your numbers, the financial institution can let you proceed in the process.
Applying for Mortgage
Gaining knowledge about the basics of home mortgages can help you become confident in your mortgage applications. For starters, the application process is straightforward. It generally follows two stages: screening and assessment.
The mortgage broker or lender will ask several questions to flush out what type of mortgage you want and the term of payment you want to arrange. The lender might conduct an initial assessment of your financial preparation to determine how much you can borrow. You will also be provided with essential information on the lender’s products, services, and applicable fees or charges.
The assessment stage can also be considered the beginning of your mortgage application. Here, you will be asked to provide your proof of income, a list of expenditures, bank statements, and other documentation, and proof of your capacity to avail a mortgage.
Once your application is accepted, you will be provided a binding offer and mortgage illustration documents where the terms of your mortgage are stipulated. You will also be given seven days or more as a reflection period where you can assess and make projections of the lender’s offer.
What Are the Available Mortgage Options?
There are two main types of mortgages available: fixed-rate mortgages and variable rate mortgages. The former means your interest rate remains the same for several years, usually for two to five years. The latter means the interest rate can change depending on the movements in the mortgage market.
The interest rate you will pay for a fixed-rate mortgage remains unchanged for the duration of the deal and is not affected by the stock market, bond market, or economic movements. This arrangement is advantageous as it allows you to work on your household budget for the monthly amortizations; it’s one of our frugal living tips with a big impact to save money.
One drawback of this arrangement is it’s slightly higher than variable-rate mortgages, and you might also miss out on decreasing interest rates. You also need to keep an eye out for the end of the fixed-rate period; you have to either look for a new deal or prepare to proceed with the lender’s standard variable rate.
Variable-rate mortgages give you the convenience of paying your amortizations at a rate that could change at any time. You might get a lower interest rate or a higher rate, depending on the market.
A good measure of countering variable rate uncertainties is to set aside funds to serve as a buffer for the possible interest rate increase. You don’t want to be unprepared for a monthly rate increase, miss your payment, and receive a debt collection demand letter.
We have only covered some of the basic processes and concepts of home mortgages. Whether you are new to the concept of mortgages or in the process of buying a second or building a house in a state with free land, you must know about your capital, LTV, and your amortization interest. Understanding the pros and cons can save you money and help your house become an income-producing asset if it’s a rental property.
Understanding your responsibility of paying your mortgage until it’s fully paid can help you stay focused on your payments and keep your home secure and a lasting legacy for your family.