Things that you probably didn’t know about Mortgage Loans!

Things that you probably didn’t know about Mortgage Loans!

The idea of buying a house comes along with a huge price tag. It is quite obvious that more than 90% of the population will not have liquid cash to buy a house. So they go out looking for other sources of finance. The mortgage is one such source of finance that most people prefer. Though mortgaging is quite sought after, there are certain things that you must know before picking it as an option to buy a house. Let’s see in detail what a mortgage loan is and the things that you didn’t know about mortgage loans before.

Mortgage Loan VS

What is a Mortgage loan?

The mortgage is a lending system that allows you to pay a fraction of a home’s cost upfront. The remaining portion is paid by the banker or the private lending institution as the case may be. The first portion paid by the borrower is called the down payment. The financial institution is going to get back the money along with interest over a period of time. The repayment period can be as long as thirty years. The repayment period that is set is known as the ‘term.’ The financial institution needs to hold something as lien to make sure that you pay the money back. The property that is held back as the lien is called the collateral. In housing loans, the house itself becomes the collateral. If the borrower doesn’t pay back the money, the lender can take possession of the house that is given as collateral.

Things that you should know before mortgaging:

A bi-weekly schedule works better:

There is usually a misconception about the bi-weekly schedule. Most people do not prefer bi-weekly schedule assuming that their burden to pay back recurs sooner than usual. But the truth is actually different. You can save a lot of money if you are paying on a bi-weekly schedule. So if your banker suggests a bi-weekly schedule, you might have to consider it.

Go for a short term loan:

If you rightly understand why a bi-weekly schedule works, then you can probably skip this paragraph. As it is rightly stated earlier, in any payback concept when the term is short you can save a lot of money. In most mortgages, the period is either 15 years or 30 years. The principal amount along with interest payable is less in 15 years when compared to 30 years. So it is a wise idea to pick 15 years when you are given with that choice.

Get a broker if required:

Brokers need not have to be shunned away all the time. The role of a broker can sometimes prove to be really helpful. They will help you find the right mortgage scheme and the right financial institution. However, the advantages of employing a middleman are subjective in nature. So analyze and get to a conclusion.

 

Know the different Types of Mortgage Loan and pick the right option!

Know the different Types of Mortgage Loan and pick the right option!

What is Mortgage?

Mortgage is a lending system in which the financial institution lends an amount to a borrower taking the asset, in this case, the house, as the collateral. The mortgage is the easiest way to pool funds for buying a house. However, it is hard when it comes to picking the right mortgage option. The simple way to rightly pick the favorable option is to either approach a mortgage broker or understand the types and choose the right option. The classification is based on the interest rates, repayment methods, repayment term, and mortgages for special situations.

Types of Mortgage Loans:

There are almost 13 different types of mortgage loans. Without giving room for unnecessary detailing, we have reduced mortgage loans into 7 different loans. Understanding these 7 types is more than enough to pick the right type. The following are the types of mortgage loans:

Repayment mortgages:

It is the basic method of repaying all mortgages. They seem a little similar to interest-only loans but they are different. Here the borrower has to pay a fixed amount every month during the whole repayment term. If the repayment period is 25 years the total amount payable, that is principal plus interest, is spread over the loan term, and the amount is paid on a monthly basis. So by the end of 25 years, you would have paid the amount, ready to own the house all for yourself.

Interest-only mortgages:

In interest-only loans, the borrower is asked to pay only the interest during the loan term, and the total amount is repaid at the end of the loan term in a lump sum. This type of loan is preferable to the ones who prefer lowest monthly payment over the loan term.

Rate-based types:

Under rate-based mortgages, there are two types: Fixed-rate mortgage and Variable-rate mortgage. Under Fixed rate mortgage the mortgage rate is fixed for a specific period say 3 years or 5 years. But after that the rate increases. You can switch to a different scheme, but that is going to cost some additional money. In variable rate mortgage, the interest rate goes up and down depending on the mortgage rate. Here the borrower is unaware of his periodical payments.

Tracker mortgages:

Tracker mortgage is just another variant of the rate-based mortgage. They move in line with the interest rate. When the base rate goes up, the mortgage rate also goes up, and when the base rate goes down, it leaves the same impact on mortgage rates too. This type of mortgage is best suited for buyers who can afford to pay high rates and trust that the rates will go down in future.

Buy-to-let mortgages:

One need not have to explain what buy-to-let out a mortgage is. Here the borrower gets the loan to buy a house and rent it out. The amount you borrow is based on the amount you earn or expected to earn through let out. However, this may not be applicable for first-time buyers.

First-time buyer mortgages:

A first-time buyer can choose any type of mortgage that he finds comfortable. However, mortgage markets are highly complicated, so a first-time buyer has to analyze the consequences and choose accordingly.

Flexible mortgages:

A flexible mortgage is a variant of the repayment mortgage. The repayment amount can fluctuate based on your payment capacity in a much. It in a month you can afford to pay more you can pay more than a month and if you go through a difficult patch you can lower the repayment amount. The former clause is applicable for most types, but the latter is available only on flexible mortgages.

How much Mortgage can I Afford

How much Mortgage can I Afford

Have you ever wondered how much mortgage you can afford and to which extent? Have you ever laid your registered account for some down payment without knowing how much mortgage you can afford? If yes then this is the platform that will let you understand all the questions in regard to the above subject. Firstly, you ought to have understood all the rules that pertain to how much mortgage you can afford. You need to greatly consider all that makes your life comfortable before determining the percentage in which you are going to pay the mortgages out of your salary. Failure to do this, you might end up suffering the entire payment period. On that note, let’s answer your question, “How much mortgage can I afford?” Firstly, you need to have access to a mortgage calculator and then consider all the involved factors that determine how much you will be paying for your home.

Mortgage

Criteria used by the LenderWhereas the lender determines the affordability criteria and the terms of payment, you should largely consider the following important factors.

The Amount of Gross Income that you get:

Your gross income plays a very important role in determining whether you can afford to pay for the available mortgages. Gross income involves the money that the property buyer makes before any taxes are made to his salary. This type of income includes part time earning, bonus income, earnings from self-employment, child support, and benefits from social security.

Your Front-end ratio:

This is generally the amount of your gross income that is dedicated to paying for your mortgages at the end of each month. Normally, payments for your mortgages involves the following components: taxes, interests, principal, and insurance.

Back end ratio:

This type of income is also known as debt-to income ratio. This kind of income generally calculates the amount of your gross income that is required to covers for your available debts. The debts involved include child support, credit card payment and any other outstanding payments. Most of the lenders in most of the times recommend that your back end ratio not to exceed 36% of your gross income.

Credit Rating:

Usually, there are two aspects that are involved when it comes to buying mortgages. If you are able to afford income on one side, on the other you are risking. Lenders have in the recent trend developed a formula which they can use to calculate the level of risk undertaken by any prospective buyer. The formula uses the credit score to calculate this. Anyone with a lower credit score normally pays a higher interest rate.

Personal criteria:

Sometimes the lender can tell you that you can afford to pay mortgages but in the real sense you are the one to analyze yourself and know exactly if you can be able to do so. Some of the things that you can consider about you and know if you can really be able to afford mortgages are as follows.

Income:

The income you earn should be able to cater for your monthly budget and at the same time pay mortgages. If your income cannot do these then you are not in a position of affording mortgages.

Expenses:

All your expenses including paying school fees your kids and reaction activities should be able to be accomplished alongside payment for the mortgages. If all you cannot manage all these things at once, then it’s crystal clear that you cannot afford mortgages.Finally, consider your lifestyle and personality and check if it can be able to fit in your budget of paying your mortgages. If at you can manage this then you are able to afford mortgages.