The debate about the benefits and dangers of a mortgage loan system is numerous and endless. In America, every second person pays a loan for housing, and 100% of the credit-worthy population of the United States has credits for cars, education, furniture and clothing. After the crisis of 2008, getting a loan for residential real estate has become much more difficult, however, there are no fewer people willing to do this.
A Mortgage Loan: What Is It?
Mortgage is a loan secured by property (in our case, real estate). The mortgage loan companies lend you the missing amount of the property value. Real estate is the property of the bank (lender) until the full repayment of the credit. The loan you received (usually for a period of 25 years) is returned to the bank with interest. The sum is divided into the main part – principal and interest (depending on the bank).
When calculating a possible loan, the financial position of the borrower is taken into account. According to the existing rules for calculating the current mortgage loan rates, the amount of real estate expenses, including credit payments, property taxes and the cost of utility bills should not exceed 32% of the total annual family income. For such calculations, there are special tables that you can familiarize yourself with at the bank or in the process of consulting with your real estate agent.
The credit term, that is, the period for which you borrow funds, can be different. There are loans without a fixed term (open mortgage) and with a fixed term, for example, for 6 months, 5 years or some other period (closed mortgage). The larger your monthly payments are, the less interest will go to the bank and, accordingly, you will quickly get rid of the need to invest your money in bank interest.
The most beneficial are the loans that give an opportunity to make additional payments to principal. This type of service is not in favor of the bank, since it reduces the percentage of interest. Banks do this in order to attract customers. Some of them allow you to pay an additional fee to principal once a year, while others allow an increase in monthly payments or provide the possibility of increasing contributions in principal as a percentage.
One way or another, with a long-term credit, paying the principal amount in the first 5 years, you significantly reduce bank payments (sometimes by half). This is easy to understand, given that each monthly payment is different in its proportional division into payments in principal and interest. That is, at first you basically pay interest to the bank, and only then pay the credit itself.
Please note that making the largest down payment possible when buying a property, you reduce the period of work for the bank. When obtaining a mortgage, also consult with specialists about the possibility of tax cuts.
Today, best mortgage loans can be divided into two types:
- Conventional loans;
- FHA loans.
Conventional loan is suitable for buyers who have funds for down payment. FHA loans are provided to the population by the state in order to motivate them to purchase a home. An FHA buyer can count on a loan with 3-5% down payment. An FHA credit is less profitable, since you have to pay monthly insurance (PMI), the real estate transaction itself will cost you more.
What Is Included In The Mortgage Repayment?
Home mortgage loans often involve various additional payments that may be unexpected for the borrower and cause him significant financial damage. When buying real estate on credit, the buyer will have to pay a one-time fee for arranging a loan, pay for notarial services for drawing up a pledge agreement, make compulsory life insurance for collateral, etc. These additional costs are not included in monthly payments, but should be included in the real interest rate. Unlike the base interest rate specified in the mortgage agreement, on the basis of which interest obligations are calculated, the real interest rate takes into account additional fees and charges and reflects how much the buyer actually pays for the year. Despite the fact that at first glance bad credit mortgage loans with the lowest base interest rate seem to be the most profitable, the final decision must be made based on the real interest rate.
The most common option is repayments in equal monthly installments. However, there are options with increasing (for optimists) amounts, with decreasing monthly payments (for pessimists) and other options. The interest rate can be fixed or floating. Loans can be given for a different number of years (30, 15, 5 years). The longer the term is, the higher the interest rate on it is as a rule. The bank that will work with you will tell you in detail about the options (according to American statistics, about 90% of buyers choose a 30 year loan with a fixed interest rate APR)
Making A Mortgage Step By Step
The process of obtaining a mortgage includes the following steps:
- Search for a suitable property (using private ads or intermediaries).
- Preparation of a set of documents.
- Opening an account and its replenishment.
- Analysis of banking programs and offers (with the help of a bank consultant and a mortgage calculator, it is important to make preliminary calculations and choose the most profitable option).
- Conclusion of a preliminary contract of sale (the deadline for the receipt of the final amount must be specified by the seller).
- Submission of documents and loan application to the selected bank.
- Conclusion of a mortgage agreement and transaction execution.
Additional costs will need to include the cost of insurance (1-3% of the loan amount), a commission to the bank (about 3%), a fee for evaluating real estate and monitoring the property (about $ 150 per year).
Can I Repay A Loan Ahead Of Schedule?
This will depend on the bank. But quite often it is not profitable for the bank and you risk paying a fine. Today, a lot of banks allow full repayment or refinancing after 6 months of credit repayment.
Loans give us the opportunity to live well here and now! The most important thing is to really assess your solvency, both today and tomorrow, to evaluate possible risks and have a margin of safety!