Home Mortgage Loans
A mortgage is a type of transaction when a bank provides a client with a targeted loan for the purchase of specific real estate against the security of the property in its ownership. At the same time, the debtor retains the ability to own and use the house or apartment, which serves as a guarantee for the client to fulfill his or her obligations. If the debtor doesn’t pay the loan, the creditor has the right to sell the pledged property and return the funds.
Mortgage loans are needed for those who cannot purchase housing for cash. Most banking programs are designed for young families and allow them to buy an apartment in a new building. Often, mortgages are used by people who do not have their own housing or who want to improve living conditions, buy or build a country house, invest in real estate to make a profit from its rent.
How is a mortgage loan different from a regular loan?
When issuing a mortgage loan, the bank uses real estate as collateral – the one that the borrower buys with the funds received, or another that he or she already owns. If the debtor stops repaying the loan, the bank has the right to foreclose on his/her property, that is, to take the apartment and sell it against the debt. The rest of the scheme is standard: the bank and the borrower conclude a loan agreement, according to which the latter receives the required amount and returns it to the bank within the agreed period with the established interest.
The loan is provided by banks, but non-credit organizations can also provide mortgages.
Advantages of mortgage home loans
The growing popularity of mortgage lending is justified by several factors:
- Convenience. You can buy expensive real estate right now;
- Benefit. The most profitable option is a short-term mortgage for a period of no more than 5-7 years, as it significantly reduces overpayments. For those who do not have their own home, the mortgage makes it possible to make a monthly payment not for renting someone else’s apartment but as payment for their own living space;
- Need. Not everyone can afford to buy real estate for cash or use the help of relatives in this matter. Often a mortgage in Michigan becomes the only way to get the required amount for your own home;
- Availability. Mortgage lending is available to a large number of citizens due to the high competition in the market.
The mortgage market index allows assessing the popularity of loans for the purchase of real estate secured by other property.
How to choose an apartment to buy?
Unlike a personal loan, a mortgage loan is issued not just for the desire to improve living conditions but for a specific property. Therefore, the first thing to start with is to choose an apartment. It can be real estate both in the secondary housing market and in a new building. When choosing a home, you should focus on your own taste and budget. Some people hire a professional realtor for this, while others use Internet services or independently call the owners using ads on specialized sites.
Often a mortgage loan is taken for an apartment in a building under construction. This allows you to save up to half the cost of the apartment and reduce the amount of interest, but it means a greater risk in terms of money and time: the developer may not have time to hand over a residential building within the specified time frame. There is one more limitation: when choosing an apartment at the construction stage, you need to be prepared for the fact that you will have to apply for a loan at a bank chosen by the developer, that is, the choice of banks will be limited.
You can get a mortgage loan for almost any apartment you like, but there are still some restrictions. Since a credit apartment acts as collateral for a bank in the overwhelming majority of cases, they have the right to decide for which type of housing they are ready to give money to the borrower. For example, some banks do not provide loans to purchase apartments in new buildings at the design or excavation stage in order to minimize the risks of contacting unscrupulous developers. Any apartment must be electrified, equipped with its own kitchen and bathroom with cold and hot water supply – otherwise it will be difficult for a bank to sell it in case of a client’s insolvency.
How to choose a bank for a mortgage loan?
After finding a dream apartment, you need to choose a lender. Interest rates in most banks usually differ by a maximum of 1–3%. For a personal loan, the difference is small, but in the case of a mortgage, we are talking about a serious amount and the backlash will be noticeable. Therefore, you must approach the study of the mortgage market as carefully as possible and choose a bank that offers the most favorable conditions.
What you should pay attention to when choosing a bank for getting a mortgage loan?
- Type of housing being purchased. There are different conditions both in terms of rates and in terms of the initial payment for apartments in houses under construction and housing in the secondary housing stock. There are also special mortgage programs for non-residential apartments and country houses. A number of lenders provide mortgage loans for purchasing a parking space;
- Interest rate. In order not to overpay to banks, you should look for the lowest rate on the market that banks offer for the type of housing you have chosen (apartment, country house, apartment, etc.). The main thing is to carefully read the loan agreement for additional conditions and footnotes;
- Loan term. It can range from a few months to 30 years. Usually, the larger the term, the lower the rate. In this matter, you should not chase profit – it is important to remember that the monthly payment should not exceed 40% of your income, otherwise you will have to save on everyday needs. The optimal term for a mortgage loan is calculated as follows: divide the amount of the loan by the amount you are willing to repay for a mortgage loan per month – this will give you the number of months in which you can repay the loan;
- The size of the initial payment. The overwhelming majority of banks do not provide a mortgage loan without a down payment. Usually, it should be at least 20% of the final price of the apartment. It is always more profitable to pay the maximum possible part of the cost – this way you will prove to the bank your reliability, and you can be offered more favorable conditions at the interest rate, which means that in the end you will achieve less overpayment;
- History of relations with the bank. If you have a salary project or an active account with a decent monthly turnover in the bank, it will be easier for you to get a mortgage there. When assessing a client’s solvency, the bank pays attention to the financial history of the future client. By the way, loans repaid in good faith will also be an advantage when making a decision in favor of the mortgage borrower;
- Availability of online service and offline bank branches in your area. Before concluding a loan agreement, make sure that the bank has an application that you can use to make monthly payments using your phone. In addition, it is nice if a bank has a branch nearby, where you can come and resolve issues.
What documents are required?
To get a mortgage loan, you will need:
- Passport – if there is no permanent residence permit, many banks will be satisfied with temporary registration;
- Second ID. For example a driver’s license, military ID, international passport;
- Documents confirming the financial condition and employment of the borrower;
- Documents on the acquired real estate object (if the mortgage is the apartment purchased as collateral);
- Documents on the collateral provided (if the existing real estate is provided as collateral);
- Documents confirming the presence of initial payment.
How to determine a comfortable payment amount?
You should also objectively assess your own financial situation – after all, problems with delays can seriously ruin your life. To do this, you should think about a comfortable amount of payment per month so that you have enough money for renting an apartment, food and other important needs. As a rule, the payment size should not exceed 30-50% of the monthly income (the situation with Michigan land loans and vacant land mortgages is the same). The recommended amount of payments does not exceed 40% of the borrower’s confirmed income. Do not forget about other obligatory payments for loans, installments, etc.
How to choose a loan term?
Banks offer mortgage loan terms for up to 30 years. The longer the relationship between the borrower and the bank lasts, the less the amount will have to be paid every month. But there are some nuances. Not everyone is psychologically ready to be a debtor for such a long time. In case of early repayment, you need to carefully monitor the execution of all the details of the contract. Therefore, you should soberly assess your capabilities and choose a financially and psychologically comfortable term of relations with the bank.
Should I buy insurance?
There are two types of insurance – insurance of the property against the risks of loss or damage and life and health insurance of the borrower. The first is mandatory by law, the second is not. Both are charged to the borrower as a fixed amount distributed as additional payments each month. Sometimes banks do not announce such an option. Its presence should not influence the bank’s decision. However, this automatically raises the interest rate on the loan, and as a result, the borrower still pays more but does not insure him-/herself against health problems. What is more profitable – to pay for insurance and sleep peacefully or to refuse it by increasing the monthly interest payment? You need to calculate individually.
Also, in some cases, the bank may require you to buy title insurance – this is insurance against the risk of loss of ownership of the purchased housing. Title insurance protects the borrower from a complete loss of money in the event of a dispute over the ownership of the purchased apartment.
How long does it take to get a mortgage?
The term for application consideration ranges from 2 hours to several days. When a decision is made, the borrower usually receives an SMS message or a call from the lender.
If the decision is negative, do not despair and give up the dream of your own home. You need to calmly and thoroughly talk with a bank representative and clarify what exactly the lender did not like. Often you get a refusal due to a lack of some documents. Or you can contact another bank.
If the bank’s decision is positive, do not rush to smash a bottle of sparkling wine against the wall of a new apartment. First, you need to deal with all the formalities so that there are no unpleasant surprises in the payment process.
You have a mortgage approved. What’s next?
It is recommended to carefully study the loan agreement – after all, it is about your money and housing. The main points of the loan agreement stipulate the following:
- loan amount;
- term and procedure for granting a loan to the borrower;
- the size of the interest rate;
- term and procedure for payment.
Before signing a contract, ask the lender to show you a payment schedule – this will help you get an idea of the debt burden and correctly distribute your budget. The payment schedule describes when and how much you must repay the loan.
How to pay off a mortgage loan?
You can repay a loan using one of two schemes. The first scheme – annuity payments – is available in most U.S. banks. In this case, payments will be the same throughout the entire term and will include the principal amount plus interest. With annuity payments, the total amount of payments will be higher, but such a scheme is more convenient for the borrower since payments will be evenly distributed over time.
The second scheme is differentiated payments. In this case, the borrower pays the bank part of the principal debt with interest that is charged on the balance of the debt. The smaller the debt, the lower the interest, therefore, with such a scheme, the financial burden on the borrower in the first months will be greater than in the last, and the amount of payments will decrease from month to month. U.S. banks rarely use such a scheme.