Mortgage Term And Repayment Frequency
Along with which type of mortgage suits your needs best, youll also have to decide the term of the mortgage and how often youll make repayments. The mortgage term is how long you will have to pay the mortgage back the maximum term is usually 20 years for mortgages over 80% of the purchase price of the property, and 30 years for mortgages under 80%.
Most lenders will allow either fortnightly or monthly repayments. Its best to time your repayments to when you get paid, so as soon as you get money into your account it immediately goes out again.
If youre looking to figure out how much you could borrow, or how much a mortgage could cost you in the long run, check out our mortgage and finance calculators.
Fixed Interest Rate Versus Adjustable Interest Rate
When you are choosing different types of mortgages, you will need to choose between a fixed rate mortgage and an adjustable rate mortgage. A fixed rate mortgage will have the same interest rate the entire length of the mortgage. An adjustable rate mortgage will offer an initial interest rate that is slightly lower than a traditional rate mortgage. However, the interest rate will adjust up over time. The mortgage will outline how often and how much they can raise the interest rate each time. As the interest rate goes up so will your monthly mortgage payment. This means you will need to worry about rising mortgage rates. It is a better option to lock in a fixed interest rate on your mortgage.
Should I Go For Daily Calculation Or Annual Calculation Of Interest
Mortgage lenders generally calculate the amount of interest you are due to pay daily, monthly or annually. It seems like a very detailed point, but understanding this will protect you from unfair lenders that may rely on borrowers confusion to make interest calculations that are blatantly unfair and add many thousands of pounds to a cost of a mortgage.
Without hesitation you should go for daily calculation, and avoid any mortgage with annual calculation.
With annual interest calculation, the lender will calculate the interest rate once for the entire year and you risk being charged interest on debts youve already repaid. For example, if your interest rate is calculated on January 1st, and you pay off £5,000 on January 2nd, youll still be charged interest as if that payment never happened. Its legal, but it is morally questionable and should be avoided at all costs.
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Factors That Impact Affordability
When it comes to calculating affordability, your income, debts and down payment are primary factors. How much house you can afford is also dependent on the interest rate you get, because alower interest ratecould significantly lower your monthly mortgage payment. While your personal savings goals or spending habits can impact your affordability,getting pre-qualified for a home loancan help you determine a sensible housing budget.
Other Considerations: Variable Vs Fixed Rate Loans
This is a key question youll need to consider regardless of the loan type you pick. Most of the loan options above are available either as fixed-rate or variable-rate loans.
If you choose a fixed-rate mortgage, your interest rate is set when you take out the loan and wont change when interest rates go up or down. This means your monthly payments will stay steady for the life of the loan.
With a variable-rate loan, also known as an adjustable-rate mortgage, your interest rate may go up or down depending on market conditions. Adjustable-rate mortgages typically start with a lower interest rate than a fixed-rate loan but will change after a certain number of years. If interest rates go up, so will your monthly payment.
How to choose? Fixed-rate loans are lower risk over the term of the loan and offer more certainty, even though the initial interest rate tends to be higher. Variable-rate loans can be a good option for people who know theyll be moving before the introductory period of their loan ends. Historically, about 75% of home buyers choose a fixed-rate loan, according to the Consumer Financial Protection Bureau.
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Home Equity Lines Of Credit
A HELOC is a secured form of credit. The lender uses your home as a guarantee that youll pay back the money you borrow. Most major financial institutions offer a HELOC combined with a mortgage under their own brand name. Its also sometimes called a readvanceable mortgage.
HELOCs are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit. It combines a HELOC and a fixed-term mortgage.
You usually have no fixed repayment amounts for a home equity line of credit. Your lender generally only requires you to pay interest on the money you use.
Getting A Mortgage Step By Step
Buying a home, especially if its your first time, can be a complicated and stressful process. But it can be easier if you give yourself enough time to prepare and put together a team of professionals who are familiar with the area you want to live in. Working with an experienced real estate agent and lender or mortgage broker can help you navigate the process.
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Why Do I Need A Good Mortgage Deal
When you take out a mortgage, you want to know first and foremost if you can afford the monthly repayments. The answer depends on how much you borrow, and also on what mortgage deal you have.
Here you can find out more about the different types of mortgage deal such as fixed rate, tracker, capped, discounted and variable.
Why Did I Get Turned Down And What Do I Do Next
Having your loan application rejected might be disappointing, but its not the end of the world. Before you think of giving up on your goal of homeownership, talk to your loan officer to find out why your request was turned down. Most applications are denied for the following reasons:
- Bad credit scoreYou can challenge any errors and possibly explain other negative information on your credit report.
- Too much debtYou may have to pay off some of your debts, or look for a less expensive home before your loan can be approved.
- Insufficient incomeIf your current rent is almost the same as your proposed mortgage payment, ask your loan officer to reconsider. Also, different lenders use different formulas to calculate how much they think you can afford. Another lender may be more accepting.
- Insufficient down paymentYou may be eligible for a government backed low- or no-down payment loan. Or, you may be able to use cash gifts from relatives to pay all or part of your closing costs.
- Low appraisal priceIf your written purchase offer includes a contingency covering a low appraisal, you may be able to negotiate a lower selling price the lender will finance.
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Federal Housing Administration Loans
FHA loans are guaranteed by the Federal Housing Administration and have qualification criteria that open the door for a variety of borrowers. With an FHA loan, your credit score and down payment are linked.
Borrowers with a minimum 580 credit score qualify for the lowest down payment: 3.5% of the purchase price. If your credit score is a bit lower , youll need to bump your down payment up to 10%. Theres a maximum debt-to-income ratio of 43% for all borrowers, and these mortgages must fund a borrowers primary residence. For all borrowers, PMI is required for down payments less than 20%.
How Much House Can I Afford
Case Study
Joe and Anne Anderson have been saving hard for a deposit, and they want to know how much house they can afford. Using the simple mortgage calculator on this page they sit down to work it out.
Anne has a pre-tax annual salary of $40,000. Joes is $32,000. Anne types these numbers into the Your salary p.a. andPartners salary p.a. fields. Together, and with a little help from Joes parents, they have managed to save $36,000 toward a deposit. Anne types $36,000 into the Your deposit field.
The Andersons paid off their credit card debt before they started saving their deposit, but they do have a car loan that requires payments of $500 per month. They dont have any other personal loans. Anne enters $500 in theOther monthly costs field. General budget expenditures do not count as other monthly costs, only credit payments.
With all the data entered, Anne hits the Calculate button and they go over the results together.
Results
The mortgage calculator suggests they can afford a mortgage between $198,000 to $277,200. This range is an indication of what banks are likely to offer them as a mortgage. Since banks have different lending requirements, and different underlying rules of how much they will lend it is impossible to give an exact figure.
The general formula is three to four times the combined incomes, after deducting any net costs from other loans. In the case of the Andersons, this net figure is $66,000.
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Avoid Cashing Out Your Equity
As you begin to build equity in your home, it can be tempting to try to cash in on that equity through a home equity loan or by refinancing and taking money out of your home. This is a bad idea because it means you will be paying money on your mortgage for years to come. Commit to buying your home and paying it off quickly now. If you can pay off your mortgage quickly, you will be able to handle emergency situations like a job loss more easily. If you cash out your equity to pay off other debt, you are putting your home at risk, and you may lose your home if you struggle to make payments in the future. Protect your home by working to pay off your mortgage and do not cash out your equity in your home.
Future Changes That Might Make An Impact
The lender will assess whether youd be able to pay your mortgage if:
- interest rates increased
- you or your partner lost their job
- you couldnt work because of illness
- your life changed, such as having a baby or a career break.
Its important that you also think ahead and plan how youd meet your payments.
For example, you can help to protect yourself against unexpected drops in income by building up savings when you can.
Try to make sure it contains enough for three months outgoings, including your mortgage payments.
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Best For Lower Interest Rates
Secured personal loans often come with lower interest rates than unsecured personal loans. Thats because the lender may consider a secured loan to be less risky theres an asset backing up your loan. If you dont mind pledging collateral and youre confident you can pay back your loan, a secured loan may help you save money on interest.
What To Consider When Getting A Conventional Mortgage
Conventional loans are ideal for borrowers who have a stable income and documented employment history. Typically you can’t qualify for a conventional loan with a credit score below 620. Lenders also look at your debt-to-income ratio , and if more than 36% of your monthly income goes toward debt payments, you might not be approved.
Conventional loans onced required a 20% down payment, but many lenders now allow less if the borrower has great credit and solid income. Technically, the down payment can be as low as 3% on a conventional loan, but if you don’t put down at least 20%, you’ll have to pay private mortgage insurance until your mortgage balance is 80% or less of the home’s value. You might also end up with a higher interest rate if you make a low down payment. Paying monthly PMI and a higher interest rate will increase the overall cost of your mortgage, so you need to weigh whether this is worth going in with a lower down payment.
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How Do Loans Work
You can look at loan types by purpose or by how they function. Here are some basic loan terms borrowers should know. Unless otherwise noted, all are available from banks, credit unions and online lenders.
- A secured loan uses an asset you own as collateral the lender can take the asset if you don’t repay the loan.
- An unsecured loan requires no collateral. They usually have higher interest rates than secured loans because they are riskier for lenders.
- An installment loan or term loan is repaid with fixed payments over a set period.
- Revolving credit lets you borrow up to a predetermined credit limit. At the end of each billing cycle, you can either repay what you’ve borrowed in full or carry over a balance to the next month, making only a minimum payment.
- Fixed rate loans have an interest rate that doesn’t change during the loan term.
- Variable rateloans’ interest rate may change with the prime rate . If the prime rate climbs, your loan interest rate may climb as well.
Here are eight of the most common types of loans and their key features.
How Much House Can I Afford With A Va Loan
Veterans and active military may qualify for a VA loan, if certain criteria is met. While VA loans require a single upfront funding fee as part of the closing costs, the loan program offers attractive and flexibleloan benefits, such as noprivate mortgage insurance premiums and no down payment requirements. VA loan benefits are what make house affordability possible for those who might otherwise not be able to afford a mortgage.
With VA loans, your monthly mortgage payment and recurring monthly debt combined should not exceed 41%. So if you make $3,000 a month , you can afford a house with monthly payments around $1,230 .
Use ourVA home loan calculatorto estimate how expensive of a house you can afford.
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How Lenders Assess What You Can Afford
Mortgage lenders base their decisions on whats known as the loan-to-income ratio the amount you want to borrow divided by how much you earn.
The most you can borrow is usually capped at four-and-a-half times your annual income
Have you had mortgage advice?
You can get advice directly from a lender who will discuss their own products, or from a broker wholl be able to look at mortgages from a range of providers.
Read Mortgage advice: should you use a mortgage adviser? for details of where to get advice.
How Does A Mortgage Work
Mortgage loans are like other loans in your life. You borrow some amount, you get an interest rate at which to pay it back, and there’s a schedule to make your monthly payments.
Mortgage payments are due on the first of each month. Lenders grant a 15-day grace period, then late fees are assessed. Many homeowners use their lender’s autopay features to prevent late payments.
You don’t need a bank account or pre-existing relationship to get a mortgage loan. You can get a mortgage loan at any of the following places:
- Local retail bank branches, such as Chase or Wells Fargo
- Neighborhood mortgage companies, such as Cross Country Mortgage or Caliber Home Loans
- Online mortgage lenders such as Rocket Mortgage or Homebuyer.com
It’s wise to apply early even before you find a home to buy.
Studies show that home buyers who learn about mortgages get lower rates than those who do not. Educated buyers pay fewer closing fees, too.
Learn about mortgages through our Homebuyer Curriculum.
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Adjustable Rate Vs Fixed Rate
Mortgages also come with a variety of other things to consider. There are fixed-rate loans, which have the same interest for the duration of the mortgage. And then there are adjustable rate mortgages, which have an interest rate that changes with market conditions after a set number of years.
Most homeowners opt for a fixed-rate mortgage. But if you know youll be selling your home or refinancing before your rate resets an adjustable rate may make sense. This is because adjustable rate mortgages typically have lower interest rates during the initial introductory period before the rate adjusts.
If I Do Opt For A Fixed Rate How Long Should I Fix For
If you do decide to go for a fixed rate mortgage to guarantee your mortgage costs, you need to decide the term of it normally two, three or five years.
Going with a five-year fixed mortgage will give you greater certainty, and can be appealing for people in stable but financially stretched circumstances who want to minimise any financial risks. But a lot can happen to your circumstances in five years, and you may end up feeling trapped by a longer term. Also, in five years your income may have increased, making any mortgage increases far more affordable.
Similarly, the huge expenses involved in moving house such as buying furniture and building work will normally be behind you after two or three years, giving you greater capacity for coping with changes in interest rates.
For these reasons, choosing to fix your mortgage for two or three years is recommended. And dont forget that at the end of the term, you can always remortgage and move on to another fixed deal if you want to.
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