Getting a mortgage is no small investment, which is why it is important that you fully understand what a mortgage is, the benefits of a mortgage, how it works, and what happens if you can no longer pay it off.
What is a mortgage?
It is first important to understand exactly what a mortgage loan is. A mortgage is an agreement between the mortgage lender, and yourself (the borrower) to provide you with the funds to finance a property when you don’t have the cash yourself. The contract will define the terms of the agreement, such as how much the monthly repayments will cost, how much interest you will pay on the payments, how many months you will have to pay back the full balance, and other conditions. A mortgage loan is slightly different from a standard loan, as the amount is significantly higher and is specifically made for purchasing a property. A mortgage is also known as a secured loan, as you are required to agree to collateral in the form of the property if you, as the borrower, can no longer make the payments. This means that the mortgage lender has the power to possess your home if you stop making payments to them. This process is called foreclosure.
The definition of a mortgage is the same amongst lenders, however, the specific mortgage product that you apply for may have different conditions, time frames, and interest rates.
Commonly, those who are buying a property will do so by borrowing the funds from a mortgage lender. There are, however, certain eligibility criteria that must be met before being accepted for a mortgage.
Benefits of a mortgage
There are many benefits to having a mortgage. Here are some examples:
A mortgage makes purchasing a home more affordable
With the prices of houses in today’s market, it is extremely difficult to save the funds to purchase a home outright. As long as you meet the criteria, a mortgage is a great way to get yourself on the housing ladder and have a manageable and affordable way to purchase a home.
Cost-effective
Mortgages typically provide a low-interest rate on the loans, in comparison to other forms of borrowing, such as loans and credit cards. The reason for this is that the loan is secured against your property, which reduces the lender's chances of losing out.
You’ll eventually be mortgage-free
If you invest in a mortgage and pay it off with no problems, you will soon be mortgage-free. This will significantly reduce your outgoings, and help you invest in new properties or projects, or retire with peace of mind.
What you need to consider before getting a mortgage
What is your credit like?
Good credit is essential if you wish to qualify for a mortgage. Your credit score is something you should check before you even consider a mortgage. There are plenty of websites that can help you determine your credit score. The level of credit score needed for a mortgage may vary with different lenders, and the type of mortgage product you are looking to apply for. You may wish to enlist the help of a mortgage advisor to assist with conducting credit checks. If you do not have a very good score, you may likely be declined or offered a poorer interest rate. If this is the case, you may consider waiting a period and working hard to build your credit score back up again.
What is your budget?
If you have an acceptable credit score, the next component to look at is your budget. This will consider how much of a deposit you are able to put down, what your income currently is (combined with your spouses if you are considering a joint mortgage), your outgoings, and any dependents that you have. This is to ensure that you have the ability to pay the mortgage you are signing up for.
As well as your budget to afford the monthly mortgage payments, you may also need to consider other financial commitments that are involved in applying for a mortgage, for example:
The deposit you can put down
The fees of your financial advisor, attorneys, and real estate agents
The administration charges from the mortgage company
Interest rates, and the agreement of how you pay the interest on your mortgage product
Insurance policies for your mortgage, building, and contents
Property taxes
Utilities
And any other relevant costs associated with getting a mortgage.
Different mortgage products
There are a plethora of mortgage products available, depending on what mortgage lender you choose to go with, the amount of the property you are purchasing, your affordability, the amount of time you choose to pay it over, whether you are a first-time buyer or an investor, or whether you have any additional assistance. It is important to do your research or enlist the help of a financial advisor, to see which options are available to you, and which best suit your situation. For example, if you are a first-time buyer, there are often organizations that offer special mortgages.
Mortgage terms
Mortgage loans typically take over a term of 15, 25, 30, or 35 years. This is usually agreed upon with your mortgage lender depending on your requirements and budget. The longer the term, the lower the repayments tend to be. However, this can also result in paying a lot more overall, either due to higher interest rates, or paying more interest as the term is longer.
Interest rates
Interest rates are agreed upon in the initial contract, and are generally adjustable, or fixed. Adjustable interest rates are often lower but come with a much higher risk as they will fluctuate in line with the market, which means your monthly payments, and the overall amount you pay is based on that. On the other hand, fixed interest rates tend to be a little higher, but are guaranteed to stay the same throughout the term of your contract, which means you know exactly what you are paying. Both hold their own pros and cons.
Understanding the process
It can be difficult when purchasing a property to know how to navigate the process correctly, as there is a lot involved, and a lot at stake. Before you start looking for properties, it is important to consider your credit and your budget first. The last thing you want to do is to find your dream property and learn you cannot afford it. Once you have your finances in order, you should be able to speak to lenders and get yourself approved. This will tell you exactly how much you can borrow, so you know what price range you can search for, as well as make the process easier when negotiating and making an offer. If you find yourself in love with a property, and competing against another buyer, if you don’t have pre-approval, it is likely that the sellers will choose the other party as they can supply proof of purchase.
Once you have made an offer, you will need to inform your mortgage lender to obtain final approval. You can then pass your mortgage lender details onto your attorneys, who will ensure the funds are in place for the sale.
What you need to know when you have a mortgage
It is vital that you follow the terms and conditions of your mortgage throughout the term of the loan. This typically includes making sure that you inform your lender if your financial circumstances change, for example, if you change jobs, and ensure that you keep up with your payments. As you are under contract, and the home is secured against the loan, there can be serious consequences if your payments are missed or you breach your contract.
There are, however, times where exceptions are made. For example, with the COVID-19 pandemic, many jobs were lost, which resulted in payments being missed. If you are in this situation, you should research and learn more about the foreclosure moratorium. Attorneys such as Leinart Law Firm, who have over 15 years experience, can help provide professional advice.
If you have a mortgage, it is possible to get a second mortgage. A second mortgage is quite common and is typically used to obtain a large sum of money, for example, to pay off existing debt, or perhaps to pay for a college education. In this situation, many homeowners choose to use the equity that has been built up in their homes. This process entails taking out a new mortgage, that will replace your existing mortgage, and enables you to take a portion of the equity out of your home.
Alternatively, a second mortgage can be taken out to purchase a second home. If you are considering a second home, you will need to ensure that your income, minus your outgoings and dependents, can cover the cost of two mortgages. Some choose this option to help them build up a property portfolio and use the money from renting them out to pay off their mortgages quicker.
A mortgage is a great thing to consider. It is important that you ensure you fully understand what you are getting yourself into.
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