The most important thing to understand about personal home mortgages is that for the majority of people they represent the biggest financial commitment of their life. Thus it is vital that you take the time to understand the product and not feel befuddled by technical mortgage terms. Read as much as you can in advance of applying so you can make an informed decision, rather than one you may come to regret.
The Federal Reserve has completed research which shows that many borrowers simply do not understand the terms of their mortgage so have introduced a new ruling to make the mortgage product more transparent to the borrower. Mortgage lenders must disclose how payments can vary over the term of the loan, and illustrate the worst case scenario of how your payments could be affected.
A common assumption is that once you have a mortgage on your home is that you then own the property. This is a fallacy as you only own the portion of equity which you have, that is the amount of the value of the house which you do not owe to the mortgage lender. You can build equity through your down payment, by paying back a portion of the principal loan each month in your monthly repayment, by overpaying the mortgage, or by house prices increasing so your home is worth more on paper.
However until the mortgage is cleared in full the title deeds will remain with the lender and you can face repossession or foreclosure at any time if your mortgage payments go unmet and the mortgage goes into default. It is far riskier to take a personal home mortgage without a substantial down payment as it is possible to move into a negative equity position if property prices go down, thus leaving you owing more on the loan than the value of your home.
When you look to obtain a mortgage there are fees attached which can be expensive, particularly if you are required to take out mortgage protection insurance. This is a requirement of all lenders when the borrower has less than 20% of the property price to use as a down payment. Mortgage protection insurance covers the lender not the borrower, and is an insurance against you defaulting on the loan. It is far better to put down at least a 20% deposit to avoid this additional cost, and to secure a better interest rate on the mortgage. The more the down payment you can afford, the better the range of mortgages available to you.
When you are considering fees ask the lender to provide good faith estimates of projected fee costs, so you aren’t subject to any nasty surprises. They are not obliged to provide this but a good lender should. Also never make the assumption that you will necessarily be able to refinance your mortgage to obtain a better deal later. There may also be penalty fees to consider if you wish to repay the mortgage early or prepay. Make sure you understand exactly which fees the mortgage carries.
Consider the length of term of the mortgage and opt for the shortest you can reasonably afford. There is no need to go with the standard 30 year mortgage if you can budget to higher payments, as this will reduce the overall cost of the mortgage over its life as the interest paid will be far less.
Finally there will be a variety of repayment options, such as interest only, fixed rates and adjustable rates. Always opt for a mortgage which repays both the capital sum and the interest together to ensure that your outstanding loan decreases, and if you have the choice opt for a fixed rate so you have the financial security of knowing what your monthly payments will be.