We always have an idea in our mind of a dream home. Real estate is a great investment and not just a permanent living solution. It is considered rewarding in the long term because its value tends to increase with time.
However, real estate is an expensive investment. Paying that kind of money upfront is impossible for most people. That’s where mortgages come in.
Diving into mortgages without knowing much about it can be hazardous. Before you take on a mortgage, you should be certain you can handle it financially. To secure your dream house, you must find the right home loan for you. Most mortgage lenders limit lending at 4.5 times a borrower’s salary, however some lenders on the mortgage market will approve mortgages at higher income multiples, such as 5 times salary mortgage.
Here is everything you need to know about mortgages before applying for a home loan.
What exactly are Mortgages?
Real estate loans are called mortgages. We use mortgages to buy any form of real estate, including houses, investment properties, etc.
Borrowers pay it off in installments over some time. The repayments include both the main amount and interest.
The longer the period, the more interest the borrower has to give. This means if you can pay it off quickly, you have less to pay.
Where Can You Get Mortgages?
There are a few different parties that are involved with mortgage loans. Here are a few different financial institutions that provide mortgages.
Commercial Banks
Commercial banks provide various kinds of loans hence it is not surprising that they also provide mortgages.
You can get your mortgage from one that you do banking with. This might make it easier for you to deal with the mortgage, as you are familiar with it and have built a trusting relationship.
Mortgage Companies
Mortgage companies specialize in providing loans for real estate. Commercial banks have many other functions, including providing other kinds of loans like a car or student loans.
A mortgage company functions in a cycle. They lend out money and get repayments. With this repayment they payout loans for a mortgage. Dealing with mortgages is their only function, so you can depend on their specialized service.
Mortgage Brokers
If you don’t know much about mortgages, a broker is just what you need. They often have years of experience and can give you specialized advice on what kind of mortgage loan is right for you.
Mortgage brokers do not lend you money but they work as a connection between lenders and lendees. They ease out the process for you and help you find what works with your financial condition.
Mortgage brokers are connected to many lenders. They can find lower rates for you. You can find mortgage brokers who work on commission, so you wouldn’t have to pay them.
If you are looking for a broker, Blutin Finance can help you find the best mortgage deal with competitive rates.
Thrift Institutions
Thrift institutions specialize in savings accounts for the public. They offer saving services and also provide mortgages for people from those savings. You have a savings account in a thrift institution, you can look into their mortgage offers.
Credit Unions
Credit unions specialize in providing credit to people. They are owned and run by members of that union. Even though it is a financial institution, it is focused on helping people by providing credit for various purposes. Their aim is to help people over making money.
Types of Mortgages
The type of mortgages is divided by their interest rates. There are two main types of mortgages. Let’s take a look at what they are and how they affect your loan.
Fixed-Rate Mortgage
For fixed-rate mortgages, the interest rate of your loan remains the same for a certain period. For example, a fixed-rate loan might have the same interest rate for five years. During that time you pay the same amount of installment every month.
This is great for people with fixed monthly budgets. People with more financial responsibilities would choose this, as they wouldn’t want their funds to be affected when the lender interest rate goes up.
One massive drawback is when the interest rates go down, you won’t be able to save money. Your interest rates will remain the same. Also, because you would have a fixed installment every month, you won’t get to pay off more at once.
Variable Rate Mortgage
For a variable rate mortgage, your interest rate will change depending on the market. If the interest is low, you will pay lower interest. However, if the interest rises, you will lose more money.
This risk of high-interest rates makes this undesirable for people living on a fixed budget. However, if you take the risk, you can enjoy more savings when the rates are low.
One beneficial aspect of variable rate mortgage is that it provides a redraw facility. Suppose you receive some money and want to pay back more of your loan. This type of mortgage allows you to do that. Also, if you choose to do that when the interest rates are low, your repayment is less.
Mortgage Down payment
Mortgage downpayment is the amount you have to pay the institution to receive the loan. It is usually 20% of the main amount of loans.
The amount of down payment you pay depends on factors like credit score, eligibility, etc. A risky lender who is considered risky by the institution might have to pay more.
Even without paying the 20%, you can still get your loan by paying anything between 5% to 20% of the principal amount, only if you pay LMI.
Lender Mortgage Insurance
Lender mortgage insurance is something you have to pay if you pay a downpayment of less than 20%. This is the financial institution’s insurance for your loan.
Everyone hates LMI as it is like paying a smaller loan with your mortgage. If possible, try to avoid the LMI by paying the 20 percent down payment.
Even if you have it takes some time to save the amount, it is the better option. LMI adds up to your monthly installments and reduces your savings further.
Mortgage eligibility
Home/property loans involve a lot of money. This is why not everyone can get mortgages. You have to be eligible for mortgages. People eligible for mortgages are over the age of 18. Any over the age of 55 is less eligible for it.
A good credit score is required for any loan. Your credit score reflects whether you will get your mortgage.
The kind of profession you are in and your monthly salary are crucial factors for eligibility. Your financial situation, assets, liabilities, etc, will be checked before you are considered eligible. Learn more about mortgage eligibility conditions here.
Conclusion
Be well informed before considering a mortgage loan. You have to figure out whether you are eligible first. It is important to weigh your income and expenses first. Lastly, if you take a mortgage loan and are capable of paying it off, your dream home can become a reality.
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