This article is about mortgages: what they are, what to look out for, how to negotiate with the banks and what to do in the current economic environment.
FirstA mortgage is a long-term loan that is secured against a property. It is a huge financial decision usually involving many thousands if not millions of dollars, and you are generally committed to repaying it over a period of at least 25 years. It is probably one of the biggest financial transactions you will ever make so it is important to take your time, get the right information, weigh up all the options and choose very carefully.
Mortgage lenders and many brokers speak a different language from the ordinary person in the street and I am going to bring this subject onto a personal level so that it will be meaningful to you.
The first three things that you need to take some time calculating are:
- how much you can afford to borrow
- what size of mortgage you can get
- how long your mortgage will last
It might be very tempting to borrow as much as possible, especially if you have found your dream home, but it is important not to borrow any more than you can afford. Make sure you save some money for extra costs you may face in the future - for example, rising property taxes, higher interest rates, sickness, redundancy, increased utility bills.......
The average mortgage term is 20 years, but you can get a mortgage for any term from 5 to 40 years. Remember, however, that with a shorter term, you will have higher monthly repayments but, because you are repaying the mortgage over a shorter time, you will pay less interest in total.
With a longer term, you will have lower monthly payments, but you will pay more interest in total.
So I am often asked, how long should I take out my mortgage for? I generally respond that the least possible term you can afford is the best as you will pay much less in interest to your bank. In fact, if you find that you have extra money at the moment because your interest rate has come down, use it to overpay your mortgage and thus reduce your debt.
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| Mortgages For Beginners - What to Look Out For in This Current Economic Environment |
There are several different types of mortgage rate, but basically they fall into 2 main categories:
Variable rate -
advantages: if interest rates fall, your repayments may also fall - but given the fact that most countries are currently on very low interest rates, it is most likely that they will go up from here.
You can usually increase your repayments and pay occasional lump sums, saving you interest.
Disadvantage: if interest rates rise, your repayments will also rise
Fixed rate -
advantage: if interest rates rise, your repayments will not increase because they are fixed until the end of your fixed term.
Disadvantages: you will usually have to pay a fee if you switch to a variable rate, remortgage or pay your mortgage off early
You cannot usually pay lump sums or extra amounts during the fixed-rate period
Your repayments will not fall if rates fall
If the country you live in currently has very low interest rates, you might want to consider fixing your rate for up to 5 or even 10 years so that you know what you monthly repayments will be.
What are the steps involved in getting your mortgage?
Firstly, there is usually an application fee charged by the lender. It is generally non-refundable and covers the lender's costs on a loan application, regardless of whether or not you end up with a mortgage. If you are granted a mortgage, this fee is often applied to your closing costs. Again, having a broker can be worth its weight in gold as I was often able to negotiate with the banks to waive this application fee for my clients. On one occasion, the bank had been extremely slow in responding to my phone calls and emails, and I complained and they not only waived the application fee, they paid my client's legal fees as well!
The next step is that the lender will usually carry out a credit check on you, so it's best to check your credit report before you apply. For example, in the UK, one lender might say yes to granting you a mortgage, while another may refuse you. If you do this too many times within a short space of time, this can create a black mark on your credit report. Indeed, this happened to me personally when I was just starting out - several different lenders carried out credit checks on me - and I had excellent credit - but I couldn't understand why I wasn't being offered a loan. It was only after checking out my status with the credit companies that I was informed that there had been lots of credit checks in the last month and they were concerned that I was taking out too many loans and might be unable to repay them. This took several weeks to sort out -and in the meantime, I missed out on several great deals - but finally, my credit was cleared and I was able to obtain mortgages. So in the future, in order to protect my clients from this unpleasant and unnecessary experience, I always made sure that the bank did not carry out a credit check on them before telling me how likely their application was to be successful.
Appraisal
A mortgage is secured by the value of a property. An appraisal gives the lender assurance that the house has enough value to cover your mortgage request. An independent appraiser or surveyor, not a realtor usually does this. This can be a minefield. I experienced this time after time in the UK where one lender would have a particularly awkward valuer who would always down-value the price of the property. So this meant that my client was declined their mortgage and often lost out on a great property. Others would have much more favourable valuers who would listen to the real estate agents and do their homework about the different properties in the area, and would not downvalue the property. Again, this is another reason to use a good mortgage broker, who often has inside knowledge of the more difficult valuers in your area.
Down Payment
The bigger the deposit you put into the property - ie. The more of your own money you use, the better the interest rate you will get from the bank. For example, if you are putting in 50% of your own money rather than just 20%, you will find that lenders will give you a much better deal. This is because the more of your own money that you put in, the less the bank needs to worry about its money. However, don't go in by the skin of your teeth - the initial costs of owning a home may increase your need for cash.
Variable rate -
advantages: if interest rates fall, your repayments may also fall - but given the fact that most countries are currently on very low interest rates, it is most likely that they will go up from here.
You can usually increase your repayments and pay occasional lump sums, saving you interest.
Disadvantage: if interest rates rise, your repayments will also rise
Fixed rate -
advantage: if interest rates rise, your repayments will not increase because they are fixed until the end of your fixed term.
Disadvantages: you will usually have to pay a fee if you switch to a variable rate, remortgage or pay your mortgage off early
You cannot usually pay lump sums or extra amounts during the fixed-rate period
Your repayments will not fall if rates fall
If the country you live in currently has very low interest rates, you might want to consider fixing your rate for up to 5 or even 10 years so that you know what you monthly repayments will be.
What are the steps involved in getting your mortgage?
Firstly, there is usually an application fee charged by the lender. It is generally non-refundable and covers the lender's costs on a loan application, regardless of whether or not you end up with a mortgage. If you are granted a mortgage, this fee is often applied to your closing costs. Again, having a broker can be worth its weight in gold as I was often able to negotiate with the banks to waive this application fee for my clients. On one occasion, the bank had been extremely slow in responding to my phone calls and emails, and I complained and they not only waived the application fee, they paid my client's legal fees as well!
The next step is that the lender will usually carry out a credit check on you, so it's best to check your credit report before you apply. For example, in the UK, one lender might say yes to granting you a mortgage, while another may refuse you. If you do this too many times within a short space of time, this can create a black mark on your credit report. Indeed, this happened to me personally when I was just starting out - several different lenders carried out credit checks on me - and I had excellent credit - but I couldn't understand why I wasn't being offered a loan. It was only after checking out my status with the credit companies that I was informed that there had been lots of credit checks in the last month and they were concerned that I was taking out too many loans and might be unable to repay them. This took several weeks to sort out -and in the meantime, I missed out on several great deals - but finally, my credit was cleared and I was able to obtain mortgages. So in the future, in order to protect my clients from this unpleasant and unnecessary experience, I always made sure that the bank did not carry out a credit check on them before telling me how likely their application was to be successful.
Appraisal
A mortgage is secured by the value of a property. An appraisal gives the lender assurance that the house has enough value to cover your mortgage request. An independent appraiser or surveyor, not a realtor usually does this. This can be a minefield. I experienced this time after time in the UK where one lender would have a particularly awkward valuer who would always down-value the price of the property. So this meant that my client was declined their mortgage and often lost out on a great property. Others would have much more favourable valuers who would listen to the real estate agents and do their homework about the different properties in the area, and would not downvalue the property. Again, this is another reason to use a good mortgage broker, who often has inside knowledge of the more difficult valuers in your area.
Down Payment
The bigger the deposit you put into the property - ie. The more of your own money you use, the better the interest rate you will get from the bank. For example, if you are putting in 50% of your own money rather than just 20%, you will find that lenders will give you a much better deal. This is because the more of your own money that you put in, the less the bank needs to worry about its money. However, don't go in by the skin of your teeth - the initial costs of owning a home may increase your need for cash.
 |
| Mortgages For Beginners - What to Look Out For in This Current Economic Environment |
Poor Credit History
If you do not have a good credit history, it is going to be much harder now to get a mortgage than it was in the days of "irrational exuberance." When people were getting mortgages just for "trading." This was known in the UK as a self-certifying mortgages. You said you could pay for it, and you signed the documentation saying that you could, and the banks believed you. People didn't have to show any accounts, any proof of income, any proof of deposit funds, they just had to sign on the dotted line that they were "trading" and the bank asked no further questions.
However, if you do not have a good credit history, you will probably pay a much higher interest rate for your mortgage - most often at least 2% over the average rate and this amounts to a much higher repayment amount that you will have to find each month.
Remortgage
If you already have a mortgage, it's very important to keep an eye on interest rates and make sure your mortgage is competitive. You may be temped to switch lenders for a better rates, but switching can be expensive so first ask your existing lender to review your rate and then see if it is still cheaper to switch. Indeed, some banks are so keen to get your new business that they will often pay your switching fees or at least make a substantial contribution towards them. These costs could include some or all of the following:
Legal fees; and arrangement fee from the new lender; a redemption fee from your existing lender, a new property valuation or a broker's fee. Some lenders offer a fee free remortgage where they will pay for basic legal work, give a refund or pay for the valuation and waive their arrangement fee. However, you must be aware of any hidden costs or extended tie-ins after the initial period, and make sure that you are going to save money each month both in the initial period and probably more importantly over the long-term.
You also need to stay with the new lender through any new penalty period imposed by the new mortgage. This is especially important if you think you might move home during the tie-in period.
f all, what is a mortgage?
If you do not have a good credit history, it is going to be much harder now to get a mortgage than it was in the days of "irrational exuberance." When people were getting mortgages just for "trading." This was known in the UK as a self-certifying mortgages. You said you could pay for it, and you signed the documentation saying that you could, and the banks believed you. People didn't have to show any accounts, any proof of income, any proof of deposit funds, they just had to sign on the dotted line that they were "trading" and the bank asked no further questions.
However, if you do not have a good credit history, you will probably pay a much higher interest rate for your mortgage - most often at least 2% over the average rate and this amounts to a much higher repayment amount that you will have to find each month.
Remortgage
If you already have a mortgage, it's very important to keep an eye on interest rates and make sure your mortgage is competitive. You may be temped to switch lenders for a better rates, but switching can be expensive so first ask your existing lender to review your rate and then see if it is still cheaper to switch. Indeed, some banks are so keen to get your new business that they will often pay your switching fees or at least make a substantial contribution towards them. These costs could include some or all of the following:
Legal fees; and arrangement fee from the new lender; a redemption fee from your existing lender, a new property valuation or a broker's fee. Some lenders offer a fee free remortgage where they will pay for basic legal work, give a refund or pay for the valuation and waive their arrangement fee. However, you must be aware of any hidden costs or extended tie-ins after the initial period, and make sure that you are going to save money each month both in the initial period and probably more importantly over the long-term.
You also need to stay with the new lender through any new penalty period imposed by the new mortgage. This is especially important if you think you might move home during the tie-in period.
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