What Is A Mortgage?

A Mortgage is an Easier Way to Acquire Property

propertyAsk any homeowner, and you will hear many stories about how exciting it is to buy a home. Everything from the search for the best location, to the layout of the house, to going through all the paperwork and finally closing the deal, is reason to get excited. When discussing what is the most important part of the purchase of a home, the mortgage will be at the top of the list almost every time.

Unless you are paying cash for your home, you will have to have some type of financing arrangements. Almost every homeowner will finance the remaining amount due on their home with a mortgage. When signing the mortgage, you are using the home that you buy as the collateral for the loan. Should you not be able to make the payments on your home at any time or break the terms of the agreement, the bank or financial institution that lent you the money has the legal right to repossess the home. This fact makes it critical that you agree to terms of a mortgage that you can financially and personally live with for up to 30 years. Professional mortgage brokers these day’s are equipped with the knowledge skills to help you structure your home loan so you don’t over financially commit.

Does Not One Size Fit All?

There are a number of types of mortgages to choose from, so you will have the flexibility to choose the one that best meets your needs and ability to pay. First, there is the fixed rate mortgage, a financial agreement that sets a specific amount of time for the loan to be paid back, generally between one and five years. When agreeing to the terms, you will agree to an interest rate that will be used to determine your monthly payments for the length of the mortgage. This is the most direct method to get a mortgage, as the monthly payments are set and you agree to make the payments for the term of the contract.

Once the contract expires, the terms of the mortgage will automatically change from a fixed rate of interest to a variable rate of interest. You may ask the lender to extend your original fixed rate mortgage for a second time.

The second type of mortgage is the variable rate mortgage. This type of mortgage has an interest rate that can change during the time of the mortgage. Many variable rate mortgages are for periods of 30 years, and is one of the most popular types of mortgages.

Variable Rate Mortgages – Better or Just Popular?

One of the reasons someone who is looking to buy a home chooses a variable rate mortgage is because interest rates can fluctuate, and you can expect them to over a 30 year period. The buyer is likely to get a lower interest rate over the 30 year period, particularly if buying a home when interest rates are high. That means you will spend less money over the 30 year life of the mortgage than if you chose a fixed rate.

When going through the loan application process, your mortgage broker or lender will review the differences between the two types of mortgages in detail. Be sure to explain your financial goals so that the lender can make the best recommendation for your particular financial situation.

About Honeymoon Rates

All variable rate mortgages are not created equal. One example of this is when lenders offer what is known as the Honeymoon Rate. This is a discounted rate that applies to the first one to three years of a loan. After that time, the interest rate will return to the normal variable interest rate charged for the mortgage.

While this sounds like an offer that is hard to refuse, you need to consider the effect the Honeymoon rate will have on your monthly payments in the long term. This is one of those times consulting with your broker is a good idea, as they can look at your specific financial situation and give you solid advice on whether you should take advantage of the offer.

Mortgage Offset Accounts

A mortgage offset account links a savings account and a mortgage, using the savings account to offset the mortgage. The amount in the savings account is used to reduce the total amount due on the mortgage. One advantage is that the money in the savings account will earn interest, further reducing the mortgage over the term of the loan. Another is that funds in the savings account are available to be used for home improvement and upgrades, so there will always be money available for maintenance and repair costs. These are a good idea, so you can have ready funds available in the event of an emergency. Rather than being forced to turn to lenders who offer those instant cash loans

Equity Line of Credit

Homeowners can take advantage of the equity built up in their home by using it to pay for home improvements, repairs, or even using the money to send their children to college. Equity is the difference between what the current market value of your home is and the amount that is owed on the mortgage.

There are two ways the equity in your home can be used – as a line of credit or as a direct loan. The loan is given to the homeowner in a single lump sum, while the line or credit is the equity made available to the homeowner to be used as needed. Differences exist between the two types when it comes to rates of interest charged on the money, so it is important to shop around and talk with a number of people at banks, credit unions, and mortgage companies to get the best possible deal.

Keep in mind that the loan or line of credit established by the equity is collateralized by your home. Like defaulting on the mortgage, if you do not meet the terms of agreement that accompany equity money, the lender can require you to sell your home to pay the loan.

Why Not, Enjoy Your Retirement With a High Quality Financial Life?

Finally, if you are already a homeowner and meet certain qualifications, you may be eligible to receive what is known as a reverse mortgage. The basic idea is for the homeowner to use a portion of the equity in their home to improve the financial quality of their retirement years.

The homeowner gets a predetermined amount of cash each month, and this money is charged interest. When the homeowner dies or the property is sold, the bank will deduct the total amount of the monthly payments made to the homeowner from the sale price of the home along with the interest charged to the monthly payments.

Retired people are the best candidates for this type of mortgage, as they can have additional income available and do not have to worry about having enough money to enjoy their retirement years. They can live in the same home without having to relocate.

Save Money Through Sound Financial Advice

Using a mortgage as a financial tool for buying a home is a safe way to secure your financial future. It takes a good amount of thought and consideration before agreeing to the right mortgage for your particular situation. Consulting with your real estate professional will give you the information you need to make the best decision, and be able to buy your home earlier than you expected.