We all know about the 'American Dream'...right? The idea that through hard work, courage, and determination one could achieve the much sought after prosperity. Okay, how about putting it into more objectively. Buying a home is the considered to be one of the biggest financial investment most of us will ever make.
In order to touch this dream, we all have to deal with a variety of complex issues. The best way to achieve this seems to be diving the dream process into some manageable objectives, like determining how much we can afford, how fair does the personal credit ratings are, and may be considering the mortgage finance options.
In this article we will learn about the mortgage finance options that may pave our way to achieve the dream.
The term 'mortgage loan or finance' can be defined as a process of securing a loan, by using the property as a security for the payment of the debt. Yes, this is very much a legal and a secured process to finance your dream of owning a house. In most countries it is considered to be a normal process of purchasing a house or any real estate property like land and plots, for personal or commercial use, without the need to pay the full value immediately. All the records are put into fine prints in form of a legal document, the mortgage deed.
Since this is a legal process where more than one party is involved, it is important to understand certain basic legal terminologies that you would often come across while referring each of the participants in the whole process of transaction and repayment period.
Creditor: The most important participant in the process. Creditors may be the individual, or an institution like bank, or finance organizations, has the legal rights to the debt or other obligations secured by the mortgage. The most important obligation is to repay the loan to creditor, who has eventually provided the purchase money to acquire the property mortgaged.
Debtor: The other significant participant (can be more than one, like joint holders of the property concerned). The onus of fulfilling the obligation of repaying the loan lies solely with him/them. The debtor must meet the conditions of the underlying loan, like the rate of interest, or other obligation and conditions of mortgage, like the repayment period.
In failing to fulfill the agreed terms and conditions, the debtor will be at the risk of foreclosure of the said loan by the creditor to recover the debt amount. In most cases, this term debtor applies to the individual who had availed the loan and had mortgaged the said property to the lender.
Before proceeding further into the details, let us first see various determinant factors that might lead us to consider the mortgage loan option. Like any other financial process, this also needs a lot of understanding, because after all it will deal with your funds.
Ask yourself the following basic questions:
Answers to question no. 1 and 2 are a bit interrelated. You can determine you affordability based on your earning, savings and analyzing your future investments. Most of the creditors or the lenders generally determine your eligibility for a particular amount based on the above factors.
So it would be a good option to arrange for the personal credit report, review the report if all the information is correct or not, and try and demonstrate a healthy repayment ability in terms of utility bills and credit card bills.
This is not by chance, but is purely your choice which ever option you will opt for to repay your debts. This again requires your analyzing skill. You have to decide between a 'repayment mortgage' and 'interest only mortgage'- you would either pay the debt with both interest and a portion of capital outstanding or paying only the interest charges on the money you have borrowed, and need to pay the total outstanding at the end of the term.
The interest terms like variable with years or fixed for a particular period as laid by the creditor might also influence your decision. You have to look and estimate the period how long would you like to continue the loan repayment.
We have discussing this particular factor in almost all the points, so it seems to be a good idea to look around how it will affect you. There are different ways of calculating the rate of interest, and each of this had its own advantages and disadvantages, and most importantly depends on the circumstances you are now.
Here we will have a glimpse of few 'rate of interest' options available to us.
[a] Standard Variable Rate [SVR]: If you have opted for a loan under this scheme, your interest payments are likely to vary, i.e., rise or fall every time there is a revision in the rate of interest by the federal banking system.
[b] Discount Rate: The mortgage loan consider discount in the amount given for the lender's standard variable rate. If SVR changes, rate you will pay also fluctuate in line with the change, but at a same level of discount.
[c] Fixed Rate: In this loan repayment option, a set rate of interest is charged to you for a pre determined period. You will find various banks and financial institutions offering you very competitive rates in terms of fixed rate of interest option.
So you are now fairly ready to understand the complexities of mortgage finance option. So what are you waiting for, go ahead and chase your dreams. But again the key is to understand and analyze. May your dreams come true!