Buying a home is probably the greatest investment that you can make since it secures the future of you and your family. However, buying a home is a process that involves several stages, especially when you choose the option of getting a mortgage loan. Very few people can manage to buy houses using cash, so the only viable alternative is to seek funding from reliable lenders. Many people often seek answers to different questions about loans. Here are the seven answers to the most asked questions about loans and mortgage payments.
- What will be your mortgage rate?
- How do you calculate your mortgage repayment interest?
- What kind of down payment do you need?
- Do you need to pay mortgage insurance?
- What is refinancing your mortgage?
- Are there any negotiable closing costs?
- What will happen if I fail to repay my loan?
First and foremost, you should be concerned about saving money when you apply for a loan or mortgage. Loans come with various rates, and these depend on different lenders. When you get a loan, you will have to make monthly payments that come with interest. The interest rates for mortgages vary from lender to lender and they are determined by various factors. If you show possibilities of risks to the lender, then you are likely to be charged a higher mortgage rate.
The risk that you present to the lender is likely to play a pivotal role in determining your mortgage rate. Borrowers with bad credit history or score are likely to experience high mortgage rates since they present risks to the lenders. In most cases, people with low down payments and questionable credit are likely to fall behind on their loan repayments. The lenders will first assess your credit history to determine your mortgage rate.
The type of property can also impact the mortgage rate pricing. If it is a multi-unit investment, then you should expect to pay a higher rate. Before you apply for a mortgage, you must make an effort to repay all outstanding loans that can affect your credit history. If you have outstanding credits, make sure you make timely payments. The other important thing is that you must try to obtain your credit score before you apply for a mortgage. Other lenders approve borrowers with low credit scores, but the risk is that they will be charged higher interest rates. If you have a higher credit score, you are likely to enjoy lower interest rates.
When you apply for a mortgage, you are interested in knowing your mortgage repayment interest. With a mortgage rate calculator, you can see your monthly loan payments and how they are calculated and come up with the final sum that you should pay. Interest rates are mainly calculated using two methods, which include fixed and variable rates. The standard variable rate (SVR) includes the basic interest rate that most lenders use for mortgages. SVR comes with higher mortgage rates than other similar options available. Each lender can set its default rates, and these are usually determined by the fluctuations in the prevailing bank rates. When the rates are high, the borrowers should also expect to pay higher monthly interest rates on their mortgages.
However, as you will see later, the borrowers can decide to remortgage their loans to get deals with favorable rates. A fixed rate is the other option that is used to calculate monthly mortgage rates. In most cases, mortgages use variable rates, and these are fixed for a specific period, usually at the beginning of the loan. Fixed rates usually apply in the countries where the governments heavily subsidize the housing market through different initiatives. Many borrowers have been opting for fixed-rate options following a spike in standard variable rates in recent years. First-time homebuyers prefer fixed-rate options since they are more attractive.
When calculating monthly mortgage payments, various aspects are taken into consideration such as principal/interest, mortgage insurance, and taxes. The bigger chunk of mortgage interest is channeled toward the principal. You should know that not all mortgage terms are the same. Therefore, you should shop around to get the best rate that you can afford.
When your mortgage is approved, you do not simply get free funds without any input toward the purchase of your home. All lenders require the borrowers to provide down payment toward their home loans to show that they are committed to purchase the property and repay their loans. Therefore, before you apply for a loan, make sure that you have some money that you can use as a down payment to secure your mortgage application.
The down payment that you can pay depends on the terms and conditions of the lender. Factors like the type of loan you choose, type of property, price of the home, occupancy rate, and credit score determine the down payment that you can make. If you have a bad credit score or history and offer a low down payment, the lender is likely to charge you a higher rate since you pose a threat. To compensate for the risk that you pose, you must offer a large down payment, if your history is bad.
Properties with high purchase prices may require a high down payment. While there is no fixed down payment for a home loan, you should know that it affects the monthly interest rate that you will pay. If you have a good credit history and you offer a bigger down payment, you are likely to be charged a low-interest rate. In contrast, borrowers who offer lower down payments are likely to get high interest rates. You can still get a home loan even when you offer a small down payment considering that it is owner-occupied and you can afford the monthly payments charged.
You may be compelled to pay mortgage insurance if you offer a low down payment to compensate for the risk that may arise. However, if your loan-to-value is at least 80%, you may not need to obtain mortgage insurance. When purchasing a house, you must pay about a 20% down payment to avoid extra expenses on mortgage insurance. The essence of insurance is to protect the property against unforeseen incidents that may happen.
Another element that you should know is that the type of loan that you get determines if you should purchase mortgage insurance or not. For instance, if you apply for an FHA loan, you must get mortgage insurance since it is treated as a prerequisite for your loan approval. Before you apply for a home loan, you must ask your lender all the things that you may need to know, concerning insurance. Other lenders do not charge insurance directly since they include it in the closing costs. You can negotiate insurance with the broker in order to get a favorable deal. The good thing about mortgage insurance is that you can obtain it from a third party which gives you the flexibility to get the best plan. Shop around to identify and choose the ideal insurance broker.
Refinancing your home can be a good idea if you want to get a new loan term with lower interest or utilize the home’s equity to consolidate debt. You can also refinance your mortgage if you intend to make home improvements that can be costly. Refinancing, as the name suggests, simply means that you obtain new financing for the property that you already own. This is more like moving your existing loan from the current lender to another so that you get better terms.
If your current interest rate on your mortgage is 7% but refinance options offer 5%, the latter can make sense, and it also helps you save a lot of money. What this simply means is that you will get another new lender who will pay off your current mortgage using a new loan that offers lower interest rates. In other words, refinancing your mortgage is more like transferring the existing loan to another lender with favorable terms.
You can also consider the cash-out refinance option that allows you to use your home equity which alters the term and rate of your existing home loan. The cash-out facility helps you use the money to cover other issues that you may wish to address at the moment, and the monthly payments to the existing loan may not go up as long as the interest rates remain stable. Make sure to use a refinance calculator so that you make an informed decision.
When the lender has approved your mortgage loan, the last step is to sign the legal documents that are required to provide you ownership of the house. To close the deal, there are closing payments and other related costs that you should meet. There is no fixed figure for the closing costs since they vary from lender to lender, and depend on multiple factors. Typically, a borrower should expect to pay about 2 to 5% of the total loan amount at the close of the deal.
There are different loan costs that you should pay, and these are subject to negotiation, depending on the lender. Other expenses include third-party fees like title insurance, which you can negotiate with the insurance brokers involved. You need to look at your loan estimate as this will help you check the services that you can get from other providers as well as the ones you can’t avail.
When it comes to loan costs, you should also know the ones that you can negotiate, but some lenders will not budge. Other lenders do not charge outright fees since they are included in the rates that you can also negotiate. Some of the common loan-related fees that you should expect to pay to include the following:
- Appraisal fees
- Assumption fees
- Origination fees
- Attorney fees
- Broker fee
- Discount fees
- Title fees
- Mortgage insurance fees
- Prepaid interest
- Taxes, insurance, and annual fees
You have a right to know all the fees that your lender may charge, as this can make a big difference in saving money on closing fees. Ask your lender the reasons why each fee is charged, and they should give you clear answers.
When you apply for a home loan, most real estate agents require that you are preapproved, to ensure that you get the loan that you can afford. You provide financial documents that will help you get the mortgage. However, the unexpected can happen, you may lose your job or source of income which can majorly impact your loan repayment. Different things are likely to happen if you fail to meet your loan repayment terms.
Late monthly payments of your mortgage can attract high-interest rates, and this can strain you financially. If you are experiencing financial challenges, you should contact the lender and let them know about your situation so that you can work out new terms. However, total failure to honor your mortgage can result in foreclosure or repossession of the home. When you buy a home using a mortgage, it remains the property of the bank until you repay all the money that you owe in order to get ownership.
In other words, the property is not yours until you pay off your debt. You risk losing the home if you fail to repay your mortgage. You will also not be able to recover the money that you have already paid toward your loan if the home is possessed. Therefore, you must be careful and understand the implications of defaulting on your mortgage repayment.
When you decide to buy a home, you should know that you are about to make a big investment in life. This can be possible if you seek funding from a reliable lender to make your life easier since it can be challenging to save cash to buy a house. While funding is a viable option, there are different things that you should know concerning mortgage payments. Foreclosure or repossession of your property is not a desirable option, so you must make an informed decision. It is imperative to understand various repayment terms and conditions of your mortgage loan so as to avoid losing your money and home.