The complete guide to mortgages

A house is probably one of the biggest purchases you’ll ever make. Paying it in cash is not possible for most of the people, so the only way to buy a house is by taking out a mortgage, which is a loan from a bank or building society, used to buy a property and secured by the collateral of specified real estate property until the borrower has paid it off in full. The borrower is obliged to pay it back with a predetermined set of payments over a predetermined period of time.

Choosing the best mortgage isn’t simple for most of the people, because there are many types of mortgages designed for different financial circumstances. Let’s take a look at the most important information you need to know before applying for a mortgage.

The different types of mortgages

There are many types of mortgages available and they’re made up of different components, from the interest rate to the length of the loan to the lender. Each of these components affect how much the loan costs and how long it will be before it’s paid off. If you refer to the interest rate, there are three main types of mortgages:

  • Fixed rate. The interest you’re charged stays the same for a number of years, typically between two to five years. At the end of the term, you can choose to re-fix again for a new term or move to a floating rate.
  • Variable rate. The interest you pay can change, so this means your repayments may go up or down.
  • A mix of fixed and variable rate. The loan is split between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion. Splitting a loan can give you a balance between the certainty of a fixed rate and the flexibility of a floating rate.

If you consider the length of the mortgage in years, you refer on the maximum amount of time it’ll take you to pay off the loan in full. Common terms range from 5, 15, 20, 25, 30, to even 50 years, so if you refer to the length, some of the main types of mortgages are:

  • 5-Year mortgages.
  • 15-Year mortgages.
  • 20-Year mortgages.
  • 25-Year mortgages.
  • 30-Year mortgages.
  • 50-Year mortgages.

These are only some of the types of mortgages, because in the market you can find other types.

Mortgage fees and costs

The amount you have to pay each month and in total over the life of your mortgage depends on the price of the house you are going to purchase and the deal you get with the bank or building society. The main fees and costs of a mortgage are:

  • Interest. It is charged as a percentage rate on the amount of the mortgage and it will affect how much you have to repay overall and what you pay each month.
  • Product fees. Also called the arrangement, reservation or booking fees, are charged for taking out the mortgage.
  • Application fees. Are charged when you apply for a mortgage, whether you end up taking it out or not.
  • Valuation fees. Are charged by your lender for working out how much your property is worth.
  • Telegraphic transfer fees. Also called CHAPS (Clearing House Automated Payment System) fee, are charged when the bank transfers the money, they are lending to your solicitor.
  • Broker fees. Are charged if you take out a mortgage recommended by a broker.
  • Early repayments fees. Are charged if you pay it off before the end of its term.
  • Exit fees. Are charged on some mortgages when you move to a new lender.
  • Late fees. Are charged if you don’t pay it by its due date.

These are the main fees and costs of a mortgage, but some banks or building society can charge other fees.

Mortgage application documents checklist

Purchasing a home is an exciting process, but gathering all the required mortgage documents can be a daunting task, particularly for first time home buyers. It may take some time to track down what you need and get the documents to your lender. Speeding up the process, by collecting these loan documents beforehand, can help you get to the closing table sooner. Here’s what you can expect to need when applying for a mortgage:

  • Photo ID, such as a driver’s license.
  • Copy of your tax returns.
  • Pay stubs or other proof of income.
  • Bank statements and other assets, such as savings, investments, insurance life, properties, etc.
  • Credit history statement, to explain negative items on your credit report, if applicable.
  • Gift letters from friends and family, if they help you buy a house by giving you money.
  • Renting history, if don’t already own a home.
  • Copy of the real estate listing.
  • Copy of the accepted purchase and sale agreement.
  • Basic identification information about each borrower.

These could not be the only documents you need to apply for a mortgage, so you need to be ready to provide all the documents the lenders need.

Choosing a mortgage that is right for you

Choosing the best mortgage is not a simple problem, but it’s vital for your financial health that you make the right choice and don’t get overwhelmed by the options, especially if you’re a first-time buyer. Here’s the list of what you need to do before applying for a mortgage, so you can choose the best mortgage for you:

  • Understand mortgage options and features.
  • Understand mortgage costs and fees.
  • Understand mortgage application documents.
  • Make a personal financial plan.
  • Compare different mortgages offers.

Remember, it’s always best to have as much information as possible, before you apply for a mortgage.

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