| Mortgages |
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At some time or another almost everyone will require a mortgage to make possible the buying of their new home. The word mortgage comes from the Old French for 'death pledge', now while not being quite that serious, taking on a mortgage is still a major decision for the majority of people. A mortgage is a financial and ethical commitment to repay a loan taken out against a piece of property, normally your home, but it could be a busines, or plot of land. To be able to purchase the property you borrow money against it and offer the property up as security against the repayment of the loan. This loan is evidenced with a note of 'deed of trust', but the mortgage itself is the transfer of interest in the property in question from the seller to the buyer. If the buyer defaults on the loan, then the mortgage will normally have, as part of its terms and conditions, the provision for the seller to take back interest in the property via repossession or foreclosure proceedings. In practice, this 'seller' who can repossess the property against a defaulted loan, will be the lender. Where this once used to be a private contract between individuals, nowadays a bank or other financial institution acts as an intermediary between buyer ad seller, and it is this institution which will deal with the processing of payments and any foreclosures should the need arise. When the documents of ownership are transferred, the name of this financial institution will be listed on the documents. There are many different kinds of mortgage, all designed to meet the different needs of property purchasers. A perennial favourite is the Fixed-rate Mortgage, where the interest rate is fixed for the term of the loan. This is a safe bet as it offers security against any dramatic rises in interest rates during the course of the loan repayments; needless to say, should interest rates go down then this might not be so beneficial. It is a good idea to speak to a mortgage adviser, or even a mortgage brokerage firm, who will be able to offer advice as to how the markets and thus interest rates are likely to perform in the light of past history. Another option available to property buyers is the Variable-rate Mortgage, where the interest rate is tied to a base rate, typically the Bank of England's base rate, and the repayments will vary as that base rate varies. The number of changes that can occur in any one year is usually limited, and this will be set out in the mortgage agreement. Many variable rate mortgages are also capped mortgages, where the interest rate changes are capped on a yearly and lifetime basis. There are however many more, newer, mortgage options that have developed as the property markets have changed. It is possible to have an interest-only mortgage, also known as an Endownment mortgage, where the repayments cover the interest only, and this leaves the buyer free to make other investment provisions to cover the repayment of the initial capital when the term of the loan has finished. You can also have a buy to let (BTL) mortgage, which have become increasingly popular as home owners have sought to take advantage of a highly bouyant housing market by buying second homes as investments with the view of having the rental income cover the additional mortgage repayments for the second home. Both of these mortgages should not be undertaken lightly, and profesional advisers should be consulted before you take such a mortgage out. These mortgages are particularly common amongst the nmber of borrowers who have difficulty in meeting their repayment obligations, or who have actually defaulted on their repayments. Most mortgages are repayment mortgage, which means that your monthly repayment covers both the interest on the loan and the initial capital of the loan. At the start of your mortgage term, the majority of the repayment goes against the interest, and only a small ammount comes off the initial capital (this makes the early balance sheets look quite odd as the capital owed hardly reduces)! As the term of the mortgage progresses, more and more of the monthly payment comes off the original capital, so that, by the end of the mortgage term then you own the property outright and the loan is retired. With the increase in second-home ownership, and the buy to let market, property prices have been somewhat artificially inflated as there has become a scarcity of available property - demand outstrips availability, thus pushing up prices. This has led to some people entering into negative equity; which is where the property you own is worth less than what you are paying for it. Such rises and falls in the economy are a natural product of capitalism, and a down turn is always followed by an upturn: if you are in negative equity, you have only lost money if you sell your property - so if possible ride out the fluctuation in the market ad you will likely as not find you have not lost out at all. However, the greatest impact of the rise in property values has been on the number of first time buyers getting onto the property ladder. The rising costs of down payments and closing costs have meant that many first time buyers cannot afford to buy because they are paying rents (that are quite high because they are set by BTL owners who need to cover their repayments). To try and help stop this anomaly, many mortgage lenders have introduced mortgages that require a lower down payment, or even no deposit whatsoever (the 100% mortgage). Other options have been to extend the terms of mortgages offered to 30, 40, or more years. Naturally the interest paid over the term of the loan, in both cases, is higher, but this solutions do offer the opportunity for people to purchase their first home when otherwise they would not be able to fund their first steps on the property ladder. Other costs are also involved in the purchase of property. Unless you live in, or are planning to move to, a government designated 'disadvantaged' area, you will be liable to pay Stamp Duty on the purchase of any property over £125,000 (under revision); there are different rates for the payment of Stamp Duty, from 1% for any property costing £125,001ad above, to 4% on any property costing £500,001 and over. You will also have to take into consideration management fees or brokers fees depending upon the type of mortgage and lender you have chosen. Also, do not forget the costs of moving itself! To be granted a mortgage might also require you to take out mortgage indemnity insurance. This insurance is designed to protect the lender when the borrower has made little or no deposit. If the borrower misses a payment, or even defaults on the loan, then the lender is protected. When a larger deposit is made, ten this type of insurance is often not required. A mortgage brokers is a good way to compare and contrast different mortgages and receive professional and qualified advice at the time. However, as a first approach there are many mortgage comparison websites which can help you determine the overall costs of a variety of different mortgages, and can be a very good way to make a shortlist of possible mortgage options for a particular type of property purchase. The rather over-hyped 'worldwide credit crunch' has made it harder to obtain a mortgage, as mortgage lenders are demanding ever higher deposits and are being increasingly selective as to who they lend to (there are some analysts who would suggest this vetting is not before time). The bad business practices of banks and other financial institutions over the 'golden years' of the past decade or so, are now being paid for by the general public. |
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