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Seeking Balance In Mortgage Risks And Rewards
You are not the only party who is taking a risk by committing to a mortgage agreement.
Your risk is that if for some reason that you are unable to repay the loan, you could potentially lose your home. The lender’s risk is that you will not repay and even foreclosure could not recover their money.
Your reward is that you will be able to purchase your home. While the reward for the lender is the interest that they will make from your business.
“A mortgage loan is a loan secured by real property through the use of a mortgage note” – Wikipedia.
In the most fundamental sense, a home buyer needs money to purchase a property. A lender has exactly what the buyer needs.
In exchange for lending funds for a borrower to buy property, the lender take the property as collateral.
They place a lien against it.
So when a buyer does not repay the loan according to the terms stipulated in the agreement, the lender will have the legal right to takeover your property and sell it to recover the debt.
There is a common saying that we should only use borrow money to buy things that would increase in value. And since real estate has historically shown to increase in value over time, it is one of the most attractive investments that investors put their money in.
With this in mind, lenders also view real estate as one of the best preferred collateral.
Even if your property depreciates in value by 10% after 2 years, you could still be ahead in the financial game as you have saved in rental on during the period of time.
You could have even rented out a room for extra cash flow income.
There are a few key risk borne by the lender.
Because no one can clearly pinpoint whether values will increase or decrease, they often cushion this risk by requiring the borrower to pay a portion of the purchase upfront.
A loan to value of 80% is common prudent practice.
So if you do fail to repay the loan, they are more likely than not to be able to recover the debt.
You might also have heard of 100% financing.
In these instances, since the lender’s risk is so high, they are likely to make up for the added risks by charging you higher interest rates.
Another factor that a lender will use to assess their risk is by analysing your credit score. If you have been make late payments consistently in recent months, you can be sure that that will adversely affect your personal credit.
When this is so, a lender will judge that it could be risky to deal with you. Again, this can result is stricter terms.
The third big factor is your personal income. This will show if you are able to service the mortgage over the long term. Your personal liabilities would also be taken into account to calculate affordability.
The higher your income, the more comfortable the lender would be.
The main risk that you take is the inability to repay the loan.
You might think that with the exuberant pay package you have, that would be no problem. But take note that organizations undertake costs cutting measures all the time and during their restructuring, the biggest cost item they cut is manpower.
So remember to plan contingencies in advance in case what you least expect to happen does indeed happen.
Evaluating a new loan is not the same as refinancing
Since refinancing a mortgage is not something you do everyday, it can be a little confusing especially when you throw in all the mortgage jargon and terminology that only those with above-average IQ can understand.
Some home owners may even wonder why would anyone replace an existing loan with a new one altogether.
It is actually not a surprise to find home owners who are not aware of the availability of this financial option. It’s good that more home owners these days are aware of such an option.
The selection criteria and whether to go ahead with it has different motivations between a new loan and a refinance.
Getting a new mortgage is almost a given when you purchase a new house.
But you do not necessarily have to remortgage if you don’t want to. You can just stick to the current terms of your existing agreement without changing anything.
So unless there is a deal on the market that clearly make your current deal look obsolete, be sure to take some time to assess whether it is worthwhile to go ahead with the hassle.
And since the refinancing process takes up precious time and valuable resources, there must be a good reason why someone agrees to go ahead and undertake the process.
If you don’t know, there are significant closing costs as well just like when you first bought the house. It will usually be for one of these 3 reasons.
- You will be able to capitalize on interest rates that are much lower than what you are already paying.
- You will be able to reduce monthly payment to alleviate you cash flow. Or increase it so as to save on interest charges and pay off the loan sooner. Take note of penalty fees.
- You intend to cash out the home equity and use those funds for other investments or just have some fun.
In essence, once you break down any loan structure into an amortization table, it will be as clear as day which are the best deals that will serve your personal interest best.
Many times you will run into situations whereby refinancing is not an obvious choice but a loan officer or mortgage broker is very insistent that you go through with it.
Remember that your disadvantages totally outweigh the advantages of these third parties. This is because you have more to lose than them.
Your house and personal lifestyle is at stake.
Unlike buying a new home where you could be rushed for time in the closing process. This often leads inexperienced home buyers into signing up for loans that they will regret about later.
When you are replacing your loan, this situation should never arise unless you have a personal agenda to meet.
Even if an offer on the table from a lender is expiring, you still have all the time in the world. Simply put up a new application to revive the offer. There must be clear benefits to go ahead.