If it weren’t for mortgage loans, a lot people wouldn’t become homeowners. Check out our guide to understanding mortgages for beginners.
Did you know that the total amount of mortgage debt in Australia in 2018 amounted to over $21 billion dollars? Mortgaging to finance house purchases is the most popular type of debt in Australia.
They are common because basically without mortgages most people would not be able to purchase a house.
For the inexperienced, mortgages can seem like a big commitment and an intimidating amount of debt. Understanding mortgages is not always easy, especially with the dizzying number of lenders available today.
How can you learn the basics about mortgages? Check our guide below to the basics of mortgages.
Where Do You Begin?
One of the best things you can do before applying for a loan is to do your homework. Shopping around will give you an idea of general interest rates available.
Some mortgage companies or banks will offer incentives to first time buyers. These may vary from company to company, so check it out first. To know the real value that a mortgage company can offer you, it is good to look at independent reviews such as this loan review.
Following this, getting a pre-approval can give you a powerful start. Essentially at this stage, your mortgage application credit level and employment are verified, which really gets you ahead of the game.
To make this check as efficient as possible, make sure you gather and arrange your documents ahead of time.
Fixed or Adjustable Rates?
Mortgages come with at least two interest rate options: Fixed or variable.
This means that your interest rate will be pre-determined and agreed before your mortgage is taken out. It will not change during the course of repayments. This may seem attractive yet fixed interest rates are generally higher than variable rate loans.
The interest rate of variable-rate mortgages is generally fixed for the initial years – often 5 years – then it can change. This may seem attractive as interest rates may change favorably in the future. However equally, and likely, they may not. Variable-rate mortgages generally have a lower interest rate initially which proves attractive to many.
If you plan to sell your house after a few years, you may wish to take out a variable rate loan, and then sell it after the initial fixed-rate period has finished.
Length of Repayment Period
You may have been told that mortgages are paid off over a 30 year period. This is often the case as this is the most popular repayment period in many countries. However, this is not the only option.
For loanees that have the correct circumstances and have an approved pre-mortgage approval, you may be given the option to repay in as little as 15 years. The advantages of this are that thanks to their lower interest rates, the monthly repayments will be more reasonable than you may think. It can cut the cost of your purchase considerably.
Of course, shorter may not suit you better. In other cases, you may be able to apply and receive permission to lengthen your repayment period to up to 40 years.
After you have been given pre-approval to apply for a mortgage, your bank or lending company will analyze how much you can be approved for. This will take into account your income, interest rates available and applicable to you, and other factors including insurance. Generally, lenders prefer this to be less than 36% of your income.
They will then approve you for an amount of money for you to spend on your house. Keep in mind that this is the amount that you are approved for. You are not obligated to take the entire amount.
Traditional mortgage arrangements will ask for your downpayment to be at about 20%. However, these days it is possible to get a mortgage with a lower initial investment.
In some countries, government schemes will allow you to get a mortgage with only a 3% downpayment. In very special cases, for example, where the government is promoting rural development, they may not even require a downpayment
Closing Costs: What Are They?
Along with the cost of the house, there are a host of other costs involved in house purchasing. These can include the loan origination fee, appraisal costs, title insurance, deed recording fees, amongst others. The fees associated with these are called “closing costs” and are often 2-5% of your loan amount.
Before you despair at the thought of another cost added to your mortgage, it is important to mention that in many locations, the seller is expected to share some or even pay all of the closing costs.
If you have gotten approval for your dream home – congratulations! However, your work is not yet complete.
Especially if you are a first-time buyer, your lender may come back to you to confirm certain details on your credit or work history. Be patient and do not panic if this occurs.
Now that your mortgage is approved, you should splash out on furniture right? Be very careful of doing anything that may affect your credit rating. It is very likely that the lender will double-check your credit rating just before handing the mortgage amount over.
A previously unseen hefty debt for new furniture could cause concern for the lender at a crucial time.
Understanding Mortgages and Much more
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