It is very likely that most of us will need a mortgage when buying a property. If you have a lot of questions before getting started, you’re not alone.
Here are 14 of the most asked questions about mortgages:
1. Do I need great credit score to get a mortgage?
Not necessarily, but it will certainly help. It is possible to get a conventional mortgage with a credit score as low as 620. However, be aware that the lower your score, the higher your interest rate will be.
2. How much of a deposit do I need?
The bigger your deposit the more you can borrow. And you can apply for loans with lower interest rates. While it’s possible to take out a loan with a 5 or 10% deposit, you will have to pay lenders mortgage insurance if you have less than a 20% deposit
3. What are closing or settlements costs, and how much should I expect them to be?
Settlement is the journey before a home is officially purchased. Documents are signed and exchanged, keys are released, and at the end of it, the business is settled. The settlement process can include valuations fees, conveyancing charges, legal costs, Government costs, and more. Closing costs can vary depending on the lender and type of loan.
4. Should I choose a fixed-rate or a variable rate mortgage?
With interest rates at an all-time low, taking the option of locking in an interest rate on your home loan to guard yourself against possible future fluctuation may be attractive. However, it pays to know the ins and outs of fixed-rate loans before committing to one.
When purchasing a property, borrowers can decide between fixed-interest loans that maintain the same interest rate over a specific period of time, or variable-rate loans that charge interest according to market rate fluctuations.
5. Should I “lock” my interest rate?
A rate lock means that you’re guaranteed today’s mortgage interest rate for some predetermined period, typically 30 to 60 days. If interest rates have been trending upward, it’s generally a good idea to lock in your rate. While the prevailing mortgage rate doesn’t usually make a big move in a month or two, it’s certainly possible.
Some loans have the ability to split your loan so that a proportion of the loan amount is variable and the remaining portion is fixed.
6. What type of mortgage is best for me?
There are different types of home loans in the market. The three most common differentiators are variable rates, fixed rates and combo rate loans. You could also consider purchasing a white-label loan. White-label loans are increasingly popular – but for those unfamiliar with the term it can be confusing. A white-label loan is essentially a home-branded loan, much like the home-branded products you see in the supermarket aisles. Like these products, white-label loans aim to deliver many of the same great features as bank-branded home loans, but for a lower cost to the customer.
7. Should I get a 15-year or 30-year term loan?
This depends on how much you want to stretch your budget. If you can afford the higher monthly payments, a 15-year mortgage usually comes with a better interest rate than a 30-year version. Not only will you pay off the house quicker, but you can save a tremendous amount of interest. On the other hand, a 30-year mortgage will cost less per month, allowing you to afford a bigger or nicer house, or one in a better location.
8. What documentation should I gather?
Your lender may ask for many different items, but in general, be prepared to show all of the following:
- Proof of employment and income (pay slips/Invoices for at least three months, and/or tax returns no longer than 18 months)
- Proof of identification
- Bank statements
- Proof of savings (lenders will often ask for your bank statements over the past three months, to review how your money flows in and out of your savings account)
- Proof of assets (give your bank a heads-up if you own other assets)
- If some or all of your down payment is coming from a gift, you will need gift letter from the source of the funds that confirm they are gift, not a loan.
- Completed application form (it’s always good to double-check your application is accurate and completed)
- Proof of current debts (if you have credit cards and other loans, they should be submitted so that the lender will have a better view of your expenses).
9. What is a pre-qualification?
A pre-qualification is a basic review of your finances to determine if you would qualify for a mortgage. In general, a pre-qualification is based on unverified information you provide and does not include a credit check or any documentation, and is therefore not a firm guarantee of a loan.
10. What is a pre-approval?
Unlike a pre-qualification, a pre-approval can be a highly useful tool in the home-buying process. It’s essentially the same thing as applying for a mortgage, just without a specific home attached to it. As part of a pre-approval, a lender will check your credit, verify your income and employment, and commit to lending a certain amount of money. A pre-approval can show sellers that you’re serious about buying a home, and that you’re likely to be able to follow through on a bid, and close on their property.
11. What is an offset account?
A mortgage account with 100 per cent offset is a fully featured transaction account that sits alongside a home loan. In many ways it acts just like a regular bank account. However, any money sitting in the offset account reduces the amount that the bank calculates interest payments against. The loan principal is reduced for the purposes of interest calculation by the amount of money in the offset account, without increasing the repayment amount.
12. Why does it take so long to close a mortgage?
Mortgages tend to take at least 30 days to originate, and many first-timers don’t expect this much of a waiting period. The short answer is that a lot of things need to happen between you submitting your mortgage application and you taking ownership of your home.
Just to name a few: You’ll need to gather documentation for your lender (and they’ll always come back and ask for more, believe me); you’ll want to schedule and complete a home inspection; the seller may need time to complete repairs; and the loan needs to make its way through underwriting. It’s a lengthy process.
13. How is my mortgage payment determined?
Depending on your situation, there are typically three or four parts of your mortgage payment:
- Principal: repayment of your outstanding balance.
- Interest: payment of the interest charged on the outstanding balance.
- Loan term: this is the period in which you intend to fully repay your loan.
- Loan structure: some loans offer the possibility of paying the principal plus interest or interest-only for a determined period of time.
14. Will my monthly payments change during the loan term?
Probably. Even with a fixed-rate loan, your payment is likely to change over time. The reason? Your property taxes and insurance expenses, upon which the escrow portion of your payment is based, tend to fluctuate. If they rise, it may be necessary for your lender to ask for a higher escrow payment.
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