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5 Mortgage Terms To Pay Special Attention To
For most people, the biggest financial commitment they make in their lifetimes are when they purchase a property.
And unless you are very well off financially, that property investment will be made with a house mortgage from a bank or any lender.
What structure of a loan you decide to accept depends on your own personal financial situation and position.
But like it or not, you are very much at the mercy of the lender if you really need those funds to purchase your house.
Because when you get pushed into a corner, you may have no choice in the end but accept unfavorable terms and high interest rates when you have no other alternative financiers to fund you.
Unless you are a seasoned property player like Donald Trump, the mortgage application process can be difficult to comprehend.
Other then a whole textbook of documents to sign, there are countless terms and conditions to read up processes to be followed. You may even think that you are applying for a job as an astronaut…
So among the whole encyclopaedia to read up and understand, there are 3 terms that you have to pay special attention to.
Knowing these important terms will give you a good idea of what to expect when you apply for a mortgage loan.
1) The first thing to note is the loan tenure or term
This is the full time line for the repayment schedule to run to completion.
Depending on where you are located, mortgages can run anywhere from 10 to 30 years.
Most people prefer to stretch the tenure so as to only make a lower monthly payment. And because lenders will make more in interest charges over a longer tenure, they will always recommend you to take up the longest loan tenure.
So if you have a bulk of cash on hand, you may want to take up a loan with a shorter tenure to save on your interest charges.
2) The second thing to understand in mind is how your chargeable interest rates will be calculated
There are generally 2 type of mortgage rates. Fixed and adjustable.
In layman terms, fixed rates remain the same throughout the loan, adjustable rates change at specified periods over time.
Loans structured with adjustable interest rates can look attractive initially, but they can make huge jumps in interest rates because they fluctuate with the market.
There may also be packages that offer fixed rates for initial years and become adjustable later.
3) Prepayment penalties
Should you be the lucky receiver of a financial windfall in future, the thought of paying off your financial commitments to the house could pop up in your mind.
This is especially when you have no investments in the pipeline that can generate you returns higher than a typical fixed deposit.
If for example, your mortgage is at 3.5% simple interest, and a fixed deposit can offer you 1% interest gain annually, the “right” choice to make with your excess funds is actually not that hard to identify. This is assuming that there are no other investment opportunities that can grant you more than a 3.5% return.
In the world of opportunity costs, you would be losing 2.5% a year if you put your money in a fixed deposit because of the outstanding mortgage.
The above is of course, an over simplified example. But you get the point.
This is why you need to scrutinize the pre-payment penalties you could potentially incur should you redeem your loan either fully or partially.
Don’t think that zero penalties are impossible. There are many loans out there structured without redemption penalties. It is your job as a borrower to find them.
4) Who are the borrowers, mortgagees and guarantors
You might be shocked at how many homeowners have no clear picture of who are in fact liable for the loan.
As I’m no lawyer, I wouldn’t give any advice on how to interpret these stuff.
But I just want to inform you to take a good look and see for yourself who is involved in borrowing the money.
Lenders are always going after the ideal scenario that everybody is liable for a loan. But this is not necessary 100% of the time.
For example, companies taking up loans often only require 51% of shareholders to be liable for a loan. However lenders would always make every attempt to raise the percentage of shareholders involved in the company to sign on the dotted line too. They do this to protect themselves should something go wrong with repayments.
And don’t forget that how these are structured can have an impact of the credit score of everyone.
5) The final term to understand is the closing costs
Find out the details of it because it can often greatly influence your decision to accept it.
If you are a smooth and hard negotiator, you can try to get the lender to absorb them fully or partially.
Closing costs consists of items like, legal fees, property appraisals, deed fee, etc. Any costs involved to taking up the mortgage can be part of the closing costs.
Don’t pretend to be a savvy property player when you are not one.
If there are charges that you don’t understand, ask to clarify them.
Sometimes a number of fees can be absorbed by the lender easily. If you don’t question them, these costs will be passed on to you if you appear like an easy target.
These 5 terms can help a great deal especially if you have no previous experience in buying a home. Also remember to check out offers from a few competing lenders. A small difference in terms can make a big overall difference for your personal finance.