When you consider that the average home owner will pay out far more in interest over the lifetime of their mortgage than their home actually cost in the first place, you can see why working to secure yourself the best possible mortgage deal now could save you tens of thousands of dollars in interest over the 25 – 30 year lifetime of your home loan.
For the majority of us our house is the single most important and expensive purchase we ever make! Because this is the case we invest a lot of time and effort into finding the perfect property in the most ideal location, however few of us invest the time and effort we should into researching and securing the best possible finance method for purchasing our home.
This article will give you a few pointers to make the search for the most ideal and personally suitable mortgage that much simpler; and bear in mind that your search for the best loans and repayment vehicles currently available can be carried out on the internet, making the whole process that much more convenient and time efficient for you.
Step One - Firstly you need to understand the different types of mortgage that are available - they come in many flavours! By taking the time to understand the way the different types of loan work, you can see which type suits you and your personal circumstances best – after all it most certainly isn’t a case of one mortgage type suiting all people!
At their most simple level most mortgages fall into one of the following categories. Different lenders will have their own variations on the theme, but if you understand the basics of the following loan categories you will be armed with sufficient data to move on to step two.
Fixed Rate Mortgages – a borrower pays a fixed interest rate for a fixed period of time and usually the longer the fixed period the higher the fixed rate. This type of mortgage protects the borrower from interest rate fluctuations and payment uncertainties but it does mean that when the loan term begins the borrower is usually paying above the best interest rates available. In the US and most other countries apart from the UK you can have a fixed rate for the duration of your mortgage. In the UK it is usual to only fix for a maximum of 10 years.
Adjustable or Variable Rate – the rate of interest payable by a borrower can vary. Lenders usually keep their interest rate fluctuations in line with the Bank of England’s base rate in the UK and the rate set by the Federal Reserve Board in the US. Certain lenders offer discounted variable rates for home loans for a fixed period to attract borrowers. The attraction of this type of mortgage is that initial rates are usually far lower than offered under the terms of a fixed rate mortgage…however over a period of time the interest rates can rise considerably and make borrowing far more expensive. Furthermore the fluctuations make it difficult for a borrower to know how much he will be paying from one month or one year to the next.
To offset the risk associated with an adjustable rate mortgage some lenders offer ‘capping’ options. Sometimes they fix the maximum level to which the interest rate you are subject to can rise for a given period of time, sometimes they fix the cap per year and sometimes for the lifetime of the mortgage.
Balloon Mortgages – popular in the US with homeowners who aren’t planning to stay in their new home for life, these mortgages are usually repayable in 5 – 7 years. They offer the advantage of lower interest rates but the disadvantage that if you are still in the home after the 5 or 7 year period you have to secure a new loan to pay off the balloon mortgage!
Jumbo Mortgages or 'Non-Conforming' Mortgages – the UK doesn’t have an equivalent of this US loan type. Basically in the US there is a legislated purchase limit set each year by the Federal National Mortgage Association (nicknamed Fannie Mae) and the Federal Home Loan Mortgage Corporation (nicknamed Freddie Mac), a jumbo loan allows the borrower to borrow over and above this amount but for the privilege they will incur higher interest rates.
Step Two – having identified which type of mortgage probably suits you best you need to consider repayment methods and you basically have two to choose from: -
Interest Only – your monthly repayments to your lender cover only the interest on the loan meaning that nothing you pay back goes towards repaying the borrowed amount; it is up to you to establish some form of savings vehicle over the lifetime of the loan period into which you pay sufficient sums to ensure you have enough capital at the end of the loan period to pay back the amount borrowed.
Capital & Interest – your monthly repayments are divided into an interest payment and a capital repayment. In the early years of the loan period most of the monthly payment is swallowed up in interest but over time the balance swaps and you start to pay off more of the capital sum borrowed.
Step Three – Now you know which mortgage type and which repayment method you favour it’s time to find the right lender! There are so many lenders offering such a variety of loans that at first it can seem a daunting prospect trying to determine which lender most suits you! However, depending on the strength of your credit record, your current employment position, how much you would like to borrow and how much of a down payment you are in a position to make, some lenders will rule themselves out and some will seem more attractive to you.
It is possible to approach an independent mortgage broker or independent financial adviser to assist you with your search. Such an individual will examine the product market place and apply his expertise to locating the best lender to suit his client’s requirements. Most of these brokers are paid a commission by the lender when you take out your mortgage; however some also charge you a fee. Make sure you find out from the broker whether you will be charged as this is potentially an additional fee you could well do without!
Finally – there are a lot of informative sites and tools like mortgage calculators available on the internet to provide you with, for example, an idea of how much you can borrow and the most efficient borrowing and repayment method to suit you and also to give you an insight into the lenders themselves.
By making use of all the tools and resources available to you and by doing your home work you will be informed and this will strengthen your loan buying position.
About the Author
Rhiannon Williamson is the publisher of http://www.shelteroffshore.com/ - the online resource for offshore and international real estate investors. |
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