A mortgage is one of life’s bigger steps. Owning a home is a commitment and a responsibility that stays with you for a long time. Yes, having your own place is very rewarding and has many advantages. But it isn’t that simple, is it?
Mortgages often run for 25 to 30 years, though terms vary by country and lender. No wonder it is one of the biggest decisions you will make. Don’t be afraid of it, but be careful. Take an honest look at your finances: do you have money for the down payment? How much will you have left in your account afterwards? Do you have a big enough emergency fund in case you lose your job? Do you know that you could lose the property if you can’t keep up with the payments?
Your life will change for decades. You will make large payments every month, so make sure you know how much is left for everything else you need to live comfortably. Now that you know it isn’t all sunshine and rainbows, let’s clear up the mystery and get you more familiar with how mortgages work.
See the benefits
Yes, it is a big and scary step, but it is also very rewarding. A mortgage can be a tool to build wealth. Instead of paying rent to a landlord, you pay off a home that will be yours. For most people, buying a home without a loan is close to impossible, so don’t be afraid of debt, but learn to use it to your advantage. If your property gains value over time, you are building something you can pass on to your family. And the cherry on top? In your own place you can finally do the renovations and decorating you have dreamed about.
Be prepared
Whether you get a mortgage depends a lot on your personal situation: your credit history, savings and assets, and type of employment. Depending on where you live, there are different rules on how much you can borrow, the maximum monthly payment and the minimum down payment. In many countries lenders expect a down payment of 10% to 20% of the price, and some programs allow less. Ask local banks what applies to you.
Want to see what a loan would cost you each month? Try our mortgage calculator.
Useful terms to know:
Fixed rate: the interest rate stays the same for an agreed period, so your payment doesn’t change.
Adjustable rate: the interest rate changes with the market, so your payment can go up or down.
Appraisal: an independent estimate of what the home is worth.
Assets: things you own that have cash value. Lenders look at them to check that you can handle a mortgage and its risks.
Down payment: the part of the purchase price you pay from your own money. The mortgage covers the rest.
Preapproval: often the first step. A document from a lender that says how much you could borrow.
Closing costs: fees for finalizing the purchase and the loan, such as lender, legal and registration fees.
LTV (loan-to-value ratio): the loan amount divided by the appraised value of the property. Lenders use it to judge their risk. The higher the ratio, the bigger the risk, and often the higher the interest rate.
Master the journey
There is no single guide that fits everyone. We are all different, and so are our situations. But you can always be better prepared than you were yesterday. Here are a few simple tips to help you along the way.
Step one: meet an advisor
Be realistic. Look ahead and make a solid plan that counts every cost of living. The mortgage payment won’t be your only housing cost. There is also insurance, utilities, maintenance and other bills.
Watch for hidden fees. Don’t decide on the interest rate alone. Each bank has other costs to consider, which are not always obvious, such as account or processing fees.
Compare banks. Step out of your comfort zone to get the best deal. Many people stick with their current bank out of habit. Look at all the offers.
Step two: analyze and apply
Expect a review. The bank will look closely at all your important information. This is how it decides on the offer, the conditions and how much it can trust you to repay.
Get your documents ready. If you are eligible, you may need extra documents, such as tax returns, pay slips or bank statements.
Agree on the terms. In the final phase, the bank sets the loan amount and monthly payment. It is the bank’s last check that you can repay the loan in the long run.
Sign the documents. Don’t rush. Take your time and read everything carefully before you sign. If it feels overwhelming, ask a specialist to review the documents.
Step three: enjoy your new home
You did it. Even after the biggest financial step of your life, keep learning about your finances. A clear monthly budget that includes your mortgage payment and all the other housing costs helps you enjoy your new home without money worries.