Understanding Mortgages: A Beginner-Friendly Guide to Home Loans
Buying a home for the first time is an exciting, but often intimidating prospect. With interest rates at historic lows, many people are considering buying a home for the first time. There's a lot to learn about loans, taxes, and taking care of your property.
The dream of homeownership begins with some key information about the biggest obstacles: getting a loan. But understanding mortgages shouldn't be difficult. This guide will give you all the basics you need to know!
Understanding Mortgages: What Does It Mean?
A mortgage a personal loan that is used to purchase a home. The house you purchase is used as collateral. Most people don't have enough money saved up to purchase a house outright and will need to take out a mortgage to pay most of the cost.
The bank is willing to give you the loan since they will be charging interest and they can always foreclose on the house and sell it in case you don't pay back the loan. But, of course, that's the worst-case scenario. As long as you make your monthly mortgage payments, everyone is happy!
Types of Mortgages
There are two main mortgage options: fixed-rate and variable rate. The interest rate in a fixed-rate mortgage stays the same for the whole length of the loan. This way, you always know what to expect and there won't be any surprise charges or rate increases. You can budget far in advance.
An adjustable-rate mortgage can change several times throughout the life of the loan. There is a period at the beginning (usually either 5, 7, or 10 years) that the rate is fixed, but after that, it can change each year.
You may get a lower rate at the beginning with an adjustable-rate mortgage, but the downside is that there is a chance it will increase later in the term.
How Much Can I Borrow?
In Australia, you can expect to be required to pay a downpayment of 20% to purchase a home. Occasionally, this could be as low as 10%. But in normal circumstances, you'll take out a loan for 80% of the cost of the home and pay 20% down right away.
Length of the Mortgage
There are two common mortgage lengths—either 15 or 30 years. You'll get lower monthly payments with a 30-year mortgage loan, but typically a lower interest rate with a 15-year loan. So, with a 15-year mortgage, your monthly payments will be a bit higher, but you'll pay less overall.
How to Get Approved
The better your credit history and the higher your income is, the better chance there is that a bank will approve your mortgage application. The bank wants to see that you have a stable income and housing.
If you are a first-time buyer, utilizing a good mortgage broker will help your application succeed. They will also be able to answer any questions that arise. They can even help you get a loan from the wholesale market as they have contacts with different financial institutions.
Now Is the Right Time
Understanding mortgages is just the first step. If you are ready to take the leap and purchase a home, now is a great time! Just determine how much you're able to pay as a downpayment, apply for a mortgage, and start shopping!
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