Understanding How Mortgages Work

Buying a new home is a big investment and if you are taking out a mortgage for your home you will also be taking on the responsibility of that for the next 25 to 30 years. Therefore, understanding what a mortgage is and how it works is important.

There are three parts to a mortgage – 1) The Monthly Payment 2) The fees 3) The down payment.

Monthly payment

The payment you make every month on your mortgage covers the main loan and also the interest, plus any property taxes or other fees that are included.

Fees

These equate to any other costs which you need to pay in advance prior to receiving the loan

Down Payment

This is the money you pay up-front in order to secure your mortgage. If you pay a higher deposit as a down payment, then your interest rate will be less along with your other fees, you’ll also build equity on the property quicker.

There are different types of mortgages available which include –

Tracker 

 This type of mortgage tracks your interest rate against the base rate of the Bank of England. Many people take this type with an introductory offer period, which can be up to 2 years. After which you can move it onto a standard rate.

Fixed-rate 

This type of mortgage offers a fixed rate which means you will pay the same monthly amount regardless of any changes in the Bank of England interest rate. Fixed mortgages are good if you like to know your monthly payments will be the same every month, you can take these over a two or five year period. 

Discount 

A discounted mortgage is where you will pay the lenders standard variable rate with a fixed discount, This type can be stepped, which means you may pay a different rate for a year and then a higher rate for the remainder of the term.

Interest-only 

When you have an interest-only mortgage you will only pay the interest each month, therefore the entire loan will need to be paid off at the end of the term.

Repayment 

This mortgage type means you will be paying off your loan including some of the interest every month, this is also a common type.

Features to look out for

Flexible mortgages allow you to take payment holidays, make lower or higher monthly payments and draw out sums of money.

These types of deals can be more expensive, so be sure to seek advice from a financial advisor.

Cashback mortgages

While having a large sum of cash may sound great, especially when you’ll have moving costs. Taking out a cashback mortgage can be costly, so be sure to investigate this thoroughly.

A mortgage can be with you for many years so it is best to look at the pro’s and con’s of all various types or better still find a good Financial Advisor who will help you make the right choice.

 We can recommend an Independent Financial Advisor when you choose an Allanwater Home who will help you arrange a mortgage and ensure you obtain the best deal for you.