Things to Know about Mortgages

Among the biggest loans that people are likely to take during their lifetime, mortgages are loans granted for financing the purchase of a house. To pay this debt off, the borrower is required to sign a legal contract and make monthly installments, including interest and a variety of other costs, over a period of 15 to 30 years. If you are interested in taking on a mortgage, there are certain important things you need to know in this regard.

What’s at risk

Keep in mind that when you sign a mortgage, you offer up your house as collateral. If you are unable to pay off the debt in time, or meet the terms of the loan, the lender can take the house back, and sell it in order to cover the debt.

How to apply

Start the process of obtaining a mortgage by reading up on how it works, and all the procedures that are involved. Once you have educated yourself on the topic, and are familiar with terms like deposit and repayment plans, fixed rates, and variable rates, etc, you should move on to drawing up a budget. Include all your monthly expenses in this budget, and see how much you can spare for monthly mortgage payments (ideally they should be around one third of your income).

Next, move on to obtaining a credit report, as this will confirm whether you qualify for a loan. Once this is done, you should carry out some calculations to see what sort of mortgage you can afford (there are a variety of mortgage calculators available online for this purpose), and see if you have sufficient savings and funds to make the down payment.

Finally, hire a mortgage broker to help you find a good deal, and gather all the documents you will need to compile your mortgage application.

Important terms

Monthly mortgage payments are made up of four basic elements, namely principal, interest, taxes, and insurance. Combined, these are referred to as PITI.

• Principal: The amount of money that was borrowed for the purpose of buying the house.
• Interest: The amount the lender charges you to use the borrowed money. Combined, principal and interest form the largest part of monthly payments, as per a process referred to as amortization.
• Taxes: The property taxes levied by the community. These are based on a certain percentage of your home’s value.
• Insurance: Lenders refuse to close mortgage deals unless you obtain home insurance which covers you from any losses that might occur due to theft, fire, bad weather and other such causes.

Shop for the right deal

Don’t accept the first deal that comes your way – most people in need of a mortgage head straight to the first bank they see, and this is the worst possible way to go about it. The best, and wisest option in terms of finances, is to find an independent mortgage broker. These brokers have a list of available lenders at their disposal, and they can browse through this to find you the best deal, which is most suited to your situation and meets most of your terms. A bank, by comparison, will simply offer you the in-house rate. Another advantage of a mortgage broker is that s/he will help you put together a convincing and appealing mortgage application.

Renewal procedure

Mortgages need to be renewed, and the percentage of people who simply sign the renewal form without reading it and send it back to their bank is alarmingly high. It is essential to look for a better deal every time your mortgage needs to be renewed. Don’t stay stuck in a rut and keep accepting the same terms over and over, even if they are not to your liking – rather, treat mortgage renewal time as an opportunity for negotiation, and look around at the deals offered by other banks, mortgage brokers, and credit unions.