Today, there are many types of loan. These include car loans, payday loans, home loans, personal loans, title loas, student loans. Secured loans have the lowest interest rates. One of the most demanded secured loans is a mortage.
The term “mortgage”, as a rule, means a bank loan issued for the purchase of housing. In fact, a mortgage is a type of collateral, which is real estate.
The borrower can use the apartment or house purchased with the creditor’s money, but if the debt is not repaid, the bank has the right to sell the collateral and thus return its funds.
Pros and cons of mortgages
In general, a mortgage loan has many advantages. It allows you to improve living conditions quickly, and not in a few years when real estate is likely to rise in price. A person can immediately move into the apartment and not spend money on renting a property.
Weigh the advantages and disadvantages of a mortgage loan.
Pros
- When buying a home with a mortgage, the bank checks whether third parties claim the property, whether it is pledged. Thus, the bank protects its interests, but for the borrower, it is also a guarantee of the security of the transaction.
- You can borrow a large amount for a very loan term.
- Mortgage rates are lower than those of personal loans.
- You can apply for a tax deduction for interest.
- There are preferential lending programs (for families, for the military) – this is a form of state support for certain categories of consumers.
Cons
- Long term loan. Over time, your financial situation may deteriorate, and you may not be able to meet your obligations to the bank. There is a risk of losing your home.
- Overpayments due to the loan term are more noticeable than for personal loans.
- You need to take out insurance. To protect their interests, banks require to insure the mortgaged property, as well as the life and health of the borrower. So the financial institution will receive guarantees for the debt repayment, even if the client experiences force majeure. Life and health may not be insured, but then the rate will be higher.
- You can not dispose of real estate – sell, donate, redevelop – without the permission of the bank.
- An initial deposit is required. You need to pay at least 10% of the cost of housing.
How to increase your chances of getting a mortgage
There are several nuances that a mortgage consultant will tell you about, but you can prepare yourself. The first thing the bank looks at is the ability of the borrower to repay the debt.
To boost your chances of getting approved for a loan:
- When applying for a loan, indicate the total amount of income for the whole family.
- Calculate your monthly payment share of your income. Often banks indicate that it should be less than 50%. The lower this value, the more chance you have to get a mortgage on the most favorable terms.
- Do not forget to indicate additional sources of income: renting out housing, monetizing a hobby, owning a business. The condition of the bank is that this income must be confirmed.
- Try to improve your credit history. Any defaults on previous loans and fines will be a significant disadvantage for the bank. A small consumer loan repaid on time will help to correct the situation. Good credit history will help you get a mortgage at a low rate.
- Co-borrowers or guarantors will also help. In case of unforeseen situations, the bank confirms that the loan debt will be paid.
What are the risks associated with the mortgage?
Before taking out a mortgage, weigh all the possible risks. We talk about the main pitfalls and how to avoid them:
- Excessive workload is the main risk for a potential borrower. If your income is reduced or a person is left without a job, it will become difficult to make payments. To prevent this from happening, you need to carefully consider all possible options for paying off the debt. Consider the term of the loan, the size of the installments – in some cases it is better to pay longer, but with lower monthly payments. Then the risks of loan default are reduced, and free money can be used for early repayment of the loan.
- Hidden fees – as a rule, banks do not charge any additional fees when a person is applying for a mortgage. However, some financial institutions continue to charge customers for opening and maintaining a loan account, issuing a loan, filling out an application, transferring money, etc. The summary of all these fees can be impressive, so carefully study the terms of the contract for hidden fees and additional payments. If something confuses you, specify all the details, and ask to amend the contract.
- The change in interest rate – the bank is not entitled to change the rate unilaterally. An exception is situations where this is expressly provided for in the terms of the contract or in the law. In any case, the lender is obliged to notify the borrower in advance of the upcoming changes, and the client must carefully read the contract before signing it. You can challenge the increase in interest rates through the courts.
- Issuance of a loan without a down payment – as a rule, if a mortgage is issued without a down payment, you will have to pay an increased interest rate. It is better to first save at least the minimum amount, and then take out a loan.
- Purchase of the insurance – according to the law, a borrower must purchase only insurance for a pledge, that is, for housing being bought. If the bank also offers to insure your life, health, etc., remember that you are not required to do this.
What documents are needed for a mortgage
The list of the required documents may vary depending on the bank and the details of the transaction. All copies must be certified. Here is an approximate list of documents needed for a mortgage loan:
- Tax returns
- Pay stubs, W-2s or other proof of income
- Bank statements and other assets
- Credit history
- Gift letters
- Photo ID
- Renting history
Tips and advice
To date, the most valuable mortgage advice looks like this:
- Soberly evaluate your options when making a decision on obtaining a mortgage loan.
- Do not participate in home loans as a co-borrower and surety unless absolutely necessary.
- Beforehand, familiarize yourself with the documents to be signed with the bank, as well as with the conditions for servicing the loan.
- If you have questions – get answers before applying for a loan – do not leave questions for later.
- Spend enough time researching the existing programs of various banks and try to find offers that allow you to get a loan on favorable terms.
- Form your own opinion about this or that lender and do not expose yourself to the influence of friends.
- When communicating with a mortgage advisor, be sure to ask questions about your responsibilities as a borrower.
- When looking for housing, do not forget how to choose the right apartment, because you will definitely not be able to change it in the near future.
Things to pay attention to
Be sure to check with your bank for the following information:
- The maximum available term of mortgage lending
- The minimum amount of the initial payment
- What is the interest rate and its dependence on the term of the loan?
- Commission fees
- Affordable insurance payments
- Is it possible to repay the debt ahead of schedule?
- Scheme for calculating penalties
The best option would be to come to the nearest branch of the bank, talk with employees, study the conditions for providing mortgage lending. Don’t hesitate to ask questions so you don’t end up with an unpleasant surprise later.
How to pay off your mortgage faster: expert advice
A mortgage loan is most often issued for a period of at least 10 years. And this means that the borrower will deny himself and his family pleasures for a long time. Here are some tips to help you figure out how to pay off your mortgage early:
- Save more money for the down payment. If possible, it is better not to rush to purchase your own home but to save more funds in order to make a tangible down payment. It will be much easier to repay $150,000 than, for example, $300,000.
- Ask for a discount when buying property. In most cases, sellers are willing to drop up to 10% of the cost in order to receive money as quickly as possible. If you manage to save at least a few tens of dollars, this is already a tangible saving.
- Choose the right banking institution. Today, many banks are ready to issue a mortgage loan and the rates are different for everyone. It is worth choosing the lowest of the proposed ones, so you can save a lot and pay off your mortgage faster.
- The loan should be taken for the maximum period. In this case, the monthly payment will be significantly less, which means that there will still be funds left for early repayment.
- Early repayment. If there is such an opportunity, it is better to use it to pay off the mortgage.
- Find new sources of income. If possible, it is better to go to work, so that the family has the means to quickly pay off the mortgage.
What to do if you can’t pay off your mortgage
If it becomes difficult to repay the mortgage, you need to inform the bank about it immediately. Possible ways to solve the problem are refinancing, loan restructuring, deferment approval, etc. Try to provide documentary evidence that income has decreased (or other reasonable circumstances have arisen) and it has become difficult to cope with the credit burden. If the information is confirmed, the bank can meet halfway and reduce the monthly payment or allow you to pay only interest, or offer another way out of the situation.
Conclusion
Own housing is good. But before you get a home loan, you should weigh the pros and cons, calculate how much money you can give every month to repay the debt and how long it will be paid. If everything suits you, then you can go to the bank and apply for a mortgage.