Its Also Possible To Pay Extra To Reduce Your Loan Term
If you cant or dont want to refinance, you can also just pay extra each month to effectively shorten the loan term.
To summarize, the longer the loan term, the lower the mortgage payment, but the more interest youll pay, and the longer it will take to build home equity.
Further complicating matters is the fact that some folks dont want to pay off their mortgages, and would rather invest their money elsewhere.
Either way, make a plan and think about what your short-term and long-term goals are before diving in.
Tip: If you arent sure what loan term to pick, you can always make larger payments on a longer-term loan .
If you go with a shorter term, youre stuck with a larger monthly payment no matter what.
To err on the side of caution, you can go with the standard 30-year term and make extra principal payments if and when you desire.
Use A Mortgage Broker
You can research mortgage providers alone, or you can go through a broker who knows the market, has access to conventional and specialist lenders, and has the experience to advise you on the best path to take.
What Is A Mortgage
A mortgage is the money you will borrow from a lender â such as a bank â to help cover the cost of the home you are buying. You make regular mortgage payments to the lender over time with the goal of owning the home outright at the end of the mortgage period.
Your mortgage payment is made up of principal and interest. The principal is the difference between the homeâs purchase price and your down payment, and the interest is the lenderâs charge for you to borrow the money from them.
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Possible Disadvantages Of A Long Term Fixed Rate Mortgage
Thereâs always a downside to bear in mind. Here are some to mull over:
- You may pay more interest overall. The longer the fixed rate, the higher the interest rate .
- No benefits from interest rate drops. While you wonât be stung by interest rate hikes, you wonât benefit from drops either. It just depends on whether you think interest rates are likely to get lower than they are right now.
- Early repayment charges and porting fees are sometimes higher. Whatâs an ERC? If you want to pay off more than your repayments, usually more than 10% of your existing balance, you might be charged for it. And whatâs porting? Porting costs are charges if you want to move house and take your mortgage with you. Again, these can be higher with longer term mortgage deals.
Get Preapproved And Stay Focused On Your Search
Theres a lot about finding a house thats out of your control. If youre in a popular real estate market, it may take a while to find a house you love thats in your price range and on which you can make a competitive offer.
But getting preapproved will make you a strong homebuyer, and it will give your offer an edge. Stay focused on your home search and be ready to act when you find a place you want to buy.
And most importantly, stay in touch with your lender. Send them updated bank statements and pay stubs so that if you do need an updated preapproval, they can turn it around quickly for you and keep you in the game.
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What Are Todays Mortgage Rates
When shopping around for a lender for your home financing needs, be sure to ask them what their average time is for getting a mortgage approval. If the lender promises an approval within 1 week, be cautious. If the lender say 2 months, be cautious as well!
Take a look at todays real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.
What Mortgage Term Is Best
This will depend on your circumstances, but its worth keeping the following in mind when making your decision:
Longer-term mortgages cost less per month because the repayments are spread over a longer-term. However, this means that your mortgage will cost you more overall because you will be charged more interest over a longer period.
Shorter-term mortgages have higher monthly repayments, but this means youll pay off the balance quicker. As a result, youll own your home outright much sooner and pay less in total because you wont be charged as much interest.
Lets look at an example. Paying off a £160,000 mortgage with an interest rate of 4% would cost:
Everyone has different financial circumstances. What may be best for one person may not be ideal for another. So the best mortgage term is one that results in affordable monthly repayments but does not have you paying more in interest than necessary.
Problems That Could Delay Getting A Mortgage
Unfortunately, there might still be bottlenecks along the way. According to Fite, common issues include delays in appraisals, tax transcript verifications from the IRS, and employers returning verifications of employment. The No. 1 cause of delay, however, is one you can preventthe borrower not turning in documents in a timely fashion.
Second Home Mortgage Requirements: How To Qualify
The application process for a second home is the same as purchasing a primary residence, or the home you live in most of the time, said Brian Coutu, a mortgage advisor at Fairway Independent Mortgage Corporation . Buyers will need to provide documentation of their income, assets, and debts, and their loan officer will pull their credit score.
Its a good idea to get preapproved* for a second home loan before you start looking at properties so you know that you will qualify and how much you can afford.
Although the application process is the same as for a primary residence, the financial requirements are higher for a second home. Here are the basic requirements for getting a mortgage on a second home.
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Which Is Better: A 25 Or 30
Again, the answer will depend on your personal circumstances and financial situation. To help you, its worth using a mortgage calculator to try different term lengths and find out how much it will cost you each month and over the entire term.
Choosing a 25-year term will be cheaper in the long run, but make sure you can afford the higher monthly payments. If a shorter term makes repayments too expensive, consider the longer 30-year term.
If interest rates go up later, your repayments will increase more if you have a shorter term, so make sure you consider rate rises when you budget for your mortgage.
As well as considering your budget, you might want to look ahead to when you would ideally like to be mortgage-free. For example, if you plan to retire in 25 years and want to be mortgage-free by then, you could choose a 25-year term if you can afford it.
What Are The Disadvantages Of A 40
The trade-off for the lower monthly payments is that the mortgage will cost you more overall. Thats because youll be paying interest for longer.
For example, if you took out a 40-year repayment mortgage and paid 3.5% interest on a £100,000 loan, youd pay a total of around £186,041, plus fees, over the lifetime of the mortgage.
The monthly payment would be just £388, but with a shorter term of 25 years, while youd have paid around £501 a month, the total cost of the mortgage would be £150,238. Thats £35,803 less.
Of course, youll also take longer to be mortgage-free. The term may stretch into retirement age, which could mean having to work longer than youd planned, so you can continue to make payments.
The interest on a repayment mortgage is calculated on the balance left to repay. So during the first few years of your mortgage, you pay more in interest than towards the loan amount. If you have a longer term, you might feel like youre hardly making a dent in the outstanding amount, early on.
Using the same examples, if you took out the 40-year mortgage, after three years, youll have paid off £3,625 of the original loan. With the 25-year mortgage, after three years youd have paid £7,916, more than twice the amount.
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How Do You Pay Mortgage Default Insurance
Mortgage default insurance is financed through your mortgage. Unlike closing costs, such as legal fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan. Continuing with the above example, the revised mortgage amount would be $260,000 + $8,060 = $268,060 this is how much you would need to borrow from your lender, in order to purchase your home.
Exchange Of Contracts To Completion 1
Once you have your mortgage offer and your solicitor or licensed conveyancer is happy with the results of searches, their enquiries of the seller and the legal title to the property, youre ready to exchange contracts .
If youre in a property chain, the other buyers and sellers have to be ready too. If not, there may be a delay.
Your solicitor or licensed conveyancer will exchange contracts with the sellers conveyancer, and youll hand over your deposit for the house. The agreement is now legally binding, and youll need buildings insurance in place at this point.
As part of exchanging contracts, a completion date will be agreed. The time it takes to complete is agreed between you and the seller. Completion dates are often set 2 weeks after exchange, but it could be as little as 1 day. There may, however, be hold-ups if a chain is involved.
On the date of completion, you should be able to pick up the keys to your new home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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What If Your Mortgage Offer Expires
Suppose you come up against unexpected delays, and its going to take longer to complete the sale than the time thats left on your mortgage offer. In that case, its essential to contact your mortgage lender as soon as possible.
Depending on your provider and the cause of your delay, you might be able to get an extension on your mortgage offer. This might involve additional fees. An extension often allows you an extra 1 month to complete the purchase of your new property.
If the lender isnt willing to offer you an extension, or youve left it too late to notify them of the delay, you might need to re-apply for your mortgage. This could involve paying for another valuation and additional solicitors fees.
Your mortgage provider will need to run the same checks they did before. If a delay is unavoidable, an extension is much better than a new application, particularly if your financial circumstances have changed for the worse.
Making Sure Youve Got Extra Flexibility
These added costs dont mean you shouldnt take advantage of lower repayments, especially if paying less each month is the only way you can afford to get on the housing ladder.
However, its worth checking the mortgage deal to see if you can overpay. Being able to do this without penalties gives you added flexibility if you get a pay rise or a cash windfall. You can also pay the contractual amount if times get tough.
Its certainly worth thinking about as any extra money you put into your mortgage over your standard monthly amount will shorten the total length of the mortgage, saving you additional interest over the lifetime of the mortgage.
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The Optimal Time Is 12 Months
In certain cases, refinancing can be done immediately. Nevertheless, you may have to wait in some situations:
- If your original mortgage was altered so that your payments became more affordable, you may be required to wait up to two years before you have the opportunity to refinance this loan.
- If you intend to complete a cash-out refinance, you may be forced to wait at least six months after your original mortgage closed.
- In the case of a refinance for a Federal Housing Administration loan, the waiting period typically lasts 210 days.
The optimal time to wait for a refinance, however, is generally 12 months after your current mortgage closes. Sometimes, applying for a refinance too soon may negatively impact your credit score, so be sure to keep this in mind. Additionally, certain mortgage lenders issue penalties to homeowners who refinance within a given time frame.
How Long Does A Complete Mortgage Offer Take To Come Through
It can take anywhere from 2 to 6 weeks to receive a mortgage offer once youve accepted an agreement in principle and youre ready to move forward with a complete application.
During this time, the lender will carry out underwriting checks. These are an in-depth assessment of your financial situation and credit history. This will require more information from you, possibly including:
Payslips from your employer
Proof of Identity
A P60 form from your employer
Copies of utility bills
This is just some of the information a lender might require. You might be asked to provide other documents, depending on your situation.
If youre self-employed, the lender may request your SA302 tax return forms and business account statements. These should usually cover the last two years and be certified by an accountant. Suppose you receive benefits, like disability allowance or Universal Credit. In that case, you might be required to show that this is a long-term source of income.
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How Do I Know If I’m Getting The Best Deal
As rates change over time, simply comparing the fixed and variable rates at the point you take your mortgage is a relatively blunt tool. To work out which is truly a better deal, look at how much interest rates would need to change before one deal beats the other. This is where a broker can really help you see the wood for the trees.
What Are The Advantages Of A Fixed Rate Mortgage
- You know exactly what your repayments are going to be for the initial term. This can be particularly helpful when it comes to budgeting, as therell be no nasty surprises during the fixed period.
- Your mortgage rate wont change even if interest rates start to rise, which can offer peace of mind during times of rate uncertainty.
- Theyre easy to understand and offered by most lenders, with an excellent range of products meaning its easy to find a deal thats right for you.
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Whats The Difference Between Mortgage Term And Mortgage Deal
Remember that mortgage term and mortgage deal are two different things. The overall mortgage term is the total length of time you will take to repay your loan . The mortgage deal, on the other hand, is the period of fixed or favourable interest rates at the start of your mortgage term, which may last up to 10 or 15 years, but is more usually between two and five years. When your deal is coming to an end, you remortgage to another one.
When you remortgage, you may or may not extend your mortgage term. For example, if you start on a 25 year mortgage and remortgage five years later, you might switch to a 20 year mortgage term. Alternatively, you might take out another 25 year mortgage in order to get lower monthly repayments .
Start The Mortgage Process Asap
Dont wait until youve found the perfect home in order to start the mortgage process. The time to start is as soon as you start thinking you might want to buy a property.
Many sellers will require that buyers get pre-approved for a mortgage before they will accept an offer. This involves the lender checking your credit rating, debt-to-income ratio, and other financial information. Depending on your circumstances , this can take anywhere from one week to several months. Once youre approved, the lender will provide a letter stating the amount of money youre approved for, then you can get to home shopping.
Before you even begin the pre-approval process, however, youll also need to take time to compare mortgage rates and find the right lender for you. Different lenders offer different terms and interest. You can search for mortgages with banks, nonbank lenders , or mortgage brokers. How long this takes will vary depending on how thorough and efficient you are in your search.
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