Beginner's Mortgage Guide
2008-08-21 20:54:06
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A house is the biggest purchase you will make in your entire life, and it should not be a complicated process. It should be, you borrow money to buy a house, and pay the money back later with interest; however, it is not that simple.
The mortgage market is very competitive since it is such a profitable industry. The list of different mortgage products is so large that it could take months of classes to fully understand the ins and outs of mortgages.
The key elements for most borrowers is the how they will pay the mortgage back, and how much interest they will pay on the mortgage.
Paying back the Principle
Most mortgages allow to make lump sum payments and pay as you go payments. Both payment types are essential to saving money and making your mortgage manageable even during rough times
Pay as you go - These payments are designed for the lender to verify that you are sound in generating income and meeting your financial obligations, specifically your mortgage. Each payment pays off a portion of your principle and interest. If you make all your payments then at the end of your amortization, time it takes to pay off your mortgage in full, you will have paid off your mortgage in full. Also, if you miss some of your pay as you go payments, then when your mortgage comes up for renewal you may get a worse interest rate or you might not even be able to get a mortgage at all, so make sure to make your payments.
Lump Sum Payments - If you run into some extra money from a bonus from work, an inheritance, alimony payments, a gift, or whatever, you can use this money to payoff your mortgage sooner. It may not seem like much; however, the more money you contribute to your mortgage, then the faster you will be mortgage free, and for every dollar you put down on a mortgage early you will generally save two. It is always beneficial to take advantage of this feature.
Types of Mortgages
Variable Rates - This means that you will pay a specified interest rate on the loan. This rate will change subject to whatever the key lending rate is. If rates go up or down, then you will have to deal with the consequences of this. Rate fluctuations can be dramatic, so if you need stability, then this is not the product for you. If you are more risk adverse, then a variable rate mortgage may be better for you.
Fixed Rates - This means that you will pay an unchanged interest rate for the term of your mortgage. You can choose a term generally ranging from one to twenty-five years. With this product you can be sure what your interest rate will be from start to finish. When interest rates are low you can get a very low rate and hold it through when the market rates go back up. For most people, this is the mortgage type of choice because it provides security of payments.
Cash Back Rates - This is when lenders a certain percentage of money back for taking a particular product. The money they give you will be made up by interest over the course of the term usually. This is great if renovations/furnishings/electronics are needed when you move in.
Before Starting, What should you find out.
How much should I borrow? Most lenders will try to lend you the maximum amount you are eligible for; however, this is usually not the best idea for most people. A good rule of thumb is to pay your mortgage with one weeks pay, invest another weeks pay, pay bills with another weeks pay, and enjoy your fourth weeks pay. This will make sure you have sufficient savings to keep you on top of things during hard times.
Which mortgage rate is the best rate? The lowest rate may not always be the best, make sure you ask a lot of questions when looking for your mortgage.
What is the best type of mortgage for me? This is fully dependent on your investment goals. If you are looking for security, then a closed term is better. If you are trying to beat the market and save some money without worrying about security, then a variable rate may be better for you.
How should I repay? There are different payment types: monthly, bi-monthly, weekly, and bi-weekly; however, what option you choose is more personal preference. A good technique is to pay when you get paid.
What other charges are there?
What does it say in the small print?
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Source: Beginner's Mortgage Guide