Many a times, even when you’ve saved, cut down expenses and all of that, you might still not have gotten enough to buy that dream house; although you would have saved enough for a down payment for a house.
So what do you do? Get a mortgage. Yep, mortgage loans.
What is Mortgage?
Mortgage is simply a loan taken out to buy property or land and the property/real estate is used as collateral. Mortgage loans are usually entered into by home buyers without enough cash on hand to purchase a home. Mortgages can also be used to borrow cash from a bank for other projects still using their house as collateral.
You can apply for a mortgage directly from a bank or building society, choosing from their product range (this would be discussed in later series). You can also use a mortgage broker or independent financial adviser (IFA) who can compare different mortgages on the market. The choice is yours.
But then again, mortgage banks usually provide enough assistance that you might not need a broker; plus with posts like this I’m pretty sure you would not need one.
Things to Consider Before Getting a Mortgage
So you’ve finally decided to get that mortgage. Now, these are the questions you need to ask yourself with conclusive answers (which you can actually write down) before you go out in search of that mortgage bank.
- How much do I need to borrow?
- How much deposit do I have?
- How much can I afford to repay each month?
- When would I like to pay it off by?
- Do I expect an increasing cash flow?
Parts of a Mortgage
A mortgage has three basic parts:
- Down payment
- Monthly payment
The down payment is the initial deposit that you make for the property. This is usually expressed as a certain percentage of the house cost. There is really no maximum down payment; but there is usually a minimum down payment.
The amount that you pay as down payment is majorly dependent on how much you can afford at the time. Some might advice getting another loan so as to be able to meet up with the minimum deposit of the lender, but I would say no to that! If you think you don’t have enough for a down payment, I would advise you go back to my previous post and see ways to cut cost and save more.
Another reason to save more is that there are a lot of other fees attached to a new house – legal fees, agency fees, renovations (if any), you might not like some things and you’d definitely want to make changes. So, you really need to have much more than the down payment.
The monthly payment is the amount needed to pay off the mortgage over the length of the loan and loan. Just as the name implies, it is done monthly.
The fees are all the costs you have to pay up front to get the loan. These fees are usually for the lenders and can be negotiated, not just ‘can be negotiated’, should be negotiated.
This is why you should have about 3-4 lender options of which you can decide to go with whoever suits you or can agrees to your own terms.
How Mortgage Works
The amount you borrow with your mortgage is known as the principal. Each month, part of your monthly payment will go toward paying off that principal (which subsequently becomes mortgage balance) and part will go toward interest on the loan.
N.B. Interest is what the lender charges you for lending you money. This varies from lender to lender and is usually subject to inflation (we’d talk about this in later series).
Moving on, the major factors that determine your monthly mortgage payments are:
- the amount of the loan,
- the term of the loan, and
- the interest rate
The amount of the loan is the money you borrow and the term is the length of time you have to pay it back. Generally, the longer your term (the length of time for payment), the lower your monthly payment but the higher the interest you get to pay eventually (just so we’re clear).
In the beginning, you owe more interest, because your loan balance is still high. So most of your monthly payment goes to pay the interest, and a little bit goes to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. Then, more of your monthly payment goes to paying down the principal.
Near the end of the loan, you owe much less interest, and most of your payment goes to pay off the last of the principal. This process is called amortization.
Lenders usually use a standard formula to calculate the monthly payment that allows for just the right amount to go to interest vs. principal in order to precisely pay off the loan at the end of the term. This calculator is available for your use on request.
To be continued…