Mortgage 101: Everything You Need To Know

If you’re eyeing to buy your dream house, but can’t afford to pay in cash, consider taking out a mortgage. When you sign up for a mortgage, your chosen lender will provide you with the amount of money needed to buy the property. In return, as a borrower, you commit to pay for your loan amount and its corresponding interests on the agreed terms. 

Thinking of buying a property? Don’t sign your mortgage paper yet unless you’ve read the basics of how a mortage works, the payments you’ll have to make, and a quick run through of the application process. 

How Does a Mortgage Work? 

Mortgage or home loans can run anywhere from 15, 25, or 30 years. Lending agencies or banks impose various interest rates, depending on the mortgage term or the length of time for repayment. Banks will also have different eligibility requirements and repayment terms. 

If you get the shortest loan term, you’d be able to pay off what you owe the fastest.  However, it’ll also mean higher monthly payments. On the other hand, a 30-year home loan means lower monthly amortizations, but higher cumulative interest rates. Some lenders, however, offer more flexible loan terms and rates.          

The downside of getting a mortgage is that you’ll only acquire ownership of the property once your loan amount is fully paid. If you fail to pay for a few months, the lender may repossess or take your home and sell it to interested buyers. 

As with any large purchases, look for the best deals and handle your mortgage properly. 

How Much Do I Need to Pay? 

Your monthly payments will depend on the following factors: 

Down payment: Most lenders require borrowers to pay a specific portion, typically set at 20% of the total loan price. In some cases, you may pay a higher amount which can further lower your monthly payment costs.       

Principal amount: This refers to the total amount of the loan provided by the lender. Hence, a $500,000 loan will require a $100,000 down payment, with the total purchase price adding up to $600,000.    

Interest: This is the monthly percentage added to your mortgage payment. Charges imposed by lending companies or banks vary. A 30-year mortgage is typically charged with a 3.125% rate, while a 10-year mortgage may have a 2.375% interest fee. Interest is paid on top of your monthly amortizations.     

Taxes: Mortgage payments include the property tax. They’re calculated based on the home or property’s total value. Lenders estimate your property tax by computing your annual tax dues and divide the said amount by 12, to represent your monthly property tax charges.  

Insurance: Homeowner’s insurance is likewise integrated into your mortgage. Lenders require this payment to cover the potential damage incurred in the property. When a borrower pays less than the required 20% of the total mortgage, the lender may likewise require other forms of insurance to protect if the borrower defaults on his or her payment.   

You can seek the assistance of Certified Mortgage Brokers to find you the best mortgage offers in the market.  

The Processes Involved in Applying for a Mortgage

A borrower can go directly to the bank or lending agency, where he’ll be interviewed by an assigned mortgage broker or a lending agency representative.

Mortgage brokers will ask for some basic information to determine what type of mortgage you prefer and for how long you want it for. Brokers will also interview you regarding your financial situation to determine how much you can afford to pay regularly and assess how much the lender may be able to lend you. These professionals will also provide you with additional information about mortgage products, fees, and charges.    

The second stage involves the broker asking the borrower more thorough questions about finances in the present and in the future. This is important to determine whether you can still repay the lender in case interest rates shoot up in the coming years.    

Once the lender accepts your application, a binding offer and documents showing your mortgage terms will be given. You have a few days to study the documents before accepting the offer. The lender can’t change the terms during this period. 

Important considerations 

• Look for the best deals, meaning low interest rates and flexible payment terms. 
• Study your financial status and make sure you have enough cash to pay for your monthly amortizations. Ideally, your monthly payment amount should not exceed 30% of your total monthly income. 
• Apart from mortgage payments, consider other bills and extra costs that you’ll have to pay regularly in relation to getting your home.   
• Lenders will study your mortgage application and assess you for your income and expenses. If you have outstanding debts, they’ll check on these too. This is to ascertain whether you can afford to pay your obligations. 
• Lenders may reject your application if they feel that you won’t be able to repay. 

Key Takeaway

Purchasing a property is a life-changing decision, and getting a mortgage is a big decision. As a prospective home buyer and borrower, you need to make an informed decision, so don’t rush things and study all offers carefully.