Mortgage Lending Basics
Are you ready to live the dream and buy your first home? Choosing the right home loan can save you thousands of dollars. If you come to the world of lending with little to no knowledge you are in for some confusing times. It’s advisable to read up as much as you can on the subject. There is plenty of information on the internet and of course once you start making enquiries with banks for home mortgages or subprime loans they will give you plenty of literature as well. Read on beneath for a basic run down of mortgage lending and some of the terms you are going to start hearing.
Mortgage Lending
There is more than one way to skin a cat, there is also more than one way to get a home loan. There are the regular lenders like banks and also subprime loans available. In today’s shaky economy, a bank loan is probably the most secure option. A subprime lender may be more appropriate if you are having trouble with your credit or need a larger loan than the mainstream banks are willing to give.
Interest Rates
Yes, this is the money that goes straight to the bank each month for your mortgage lending. Look for home mortgages with a low interest rate, but make sure you also look into what the fees are. Some banks will try and fool you with a low interest rate but high fees; you may end up paying more in the long run. A good credit rating will make you more appealing to home lending banks, you are a lower risk to them which mean you should be able to negate a better deal. You will likely have the option of a variable or fixed interest rate, this is a difficult decision.
A fixed rate gives you security if standard rates go up, you will be locked in at the rate you started with. You most likely will not be able to pay any extra money off your loan without incurring a penalty. Also there is a chance interest rates may go down and you will be stuck with the higher rate. In these instances you can change your loan from fixed to variable but this will come with a hefty fee attached. A variable rate means the interest rate will go up and down with the standard rate, but you face the risk of it going up. If you have a variable rate, it does not usually incur a fee if you want to change to a fixed rate – but it depends on your lender and loan package.
Loan to Value Ratio
The key here is to keep it low when it comes to mortgage lending. A loan to value ratio, or LVR, is basically the value of the property opposed to the value of the loan. An LVR of eighty percent or under is ideal, in fact if you are able to achieve this, your bank may offer you a lower interest rate and not charge you any mortgage insurance. If you expect your LVR to be higher than this, consider lowering your debt. Not only will it save you money on your loan, but will give you more financial freedom later on to do the things you want. Remember, if your debt is a little less you will have more opportunity to pay a little extra of your mortgage each month. This will make a huge difference to your debt; it will reduce far quicker if you are paying extra. Even small sums will add up very quickly if you take this strategy on board.