If you've never taken out a loan before and are looking for your first home, you might not know how mortgages work or what the different kinds of mortgages are. If you're about to get your first mortgage, you should know the basics about what they are and how they work. Here is some good advice about how mortgage lending works:
What is a home loan?
A mortgage is the loan you get to pay for a house or other property. The loan has two parts: the principal and the interest. The capital is the amount you actually borrowed to buy the property, and the interest is what the lender charges you for the privilege of borrowing. There are different kinds of mortgages, but the two most common are mortgages with payments and mortgages with only interest. With a repayment mortgage, you pay back the principal and interest each month. With an interest-only mortgage, you only pay the interest each month. At the end of the mortgage term, you pay off the rest of the loan. No matter what kind of mortgage you want, there are a few things you should think about:
Rate of interest
The interest rate on a mortgage is very important, because the lower the rate, the less you will pay back over the life of the loan. At about 5 or 6 percent, mortgage rates are lower than those for most other types of loans. But you should look around for the best rate of interest, as even. Over 20 or 30 years, a difference of 5 percent can add up to a lot more money to pay back.
Exit fees
When you get a mortgage, you decide how long it will take you to pay back the loan. This is called the mortgage term. Most mortgages last between 15 and 25 years. But during this long time, you might find a better deal or decide you want to change the terms of your mortgage. If you want to switch lenders during the term of your mortgage, the current lender will usually charge you an exit fee. This amount can be quite high and is usually a percentage of what you still owe. You want a mortgage with low interest rates, but you should also make sure you can change lenders easily if you need to.
Insurance
As with any loan, you will be offered mortgage insurance in case you get sick, lose your job, or die and can't make your mortgage payments. Having insurance means that if you die, your family will still be able to pay the mortgage even without your income. Make sure you don't pay too much for mortgage insurance and that your other insurance policies don't already cover you. If you don't have insurance, it's a good idea to get mortgage insurance.
How do you get a mortgage?
You can get a mortgage from a bank, a company that specialises in mortgages, or an online lender. Before committing to one lender for a mortgage, you should look around for the best deals. You need to show proof of income and how much the property you want to buy is worth in order to get a mortgage. The lender will then figure out how much money they can give you. Before looking at homes, it's often a good idea to talk to your lender about how much you can borrow. That way, you'll know how much you can spend on your new home.
