Mortgage

Not every mortgage is the same. When you apply for a mortgage, your provider may present you with several different options. We’ve looked at a few of the most important ones here.

Repayment Mortgage

This is the standard mortgage arrangement that most people will be familiar with. You borrow a certain sum and pay this back with interest in regular installments over a given period.

Interest-Only Mortgage

Under this payment structure, borrowers pay back only the interest they owe on their mortgage in repayments. They do not owe the principal amount (the amount they borrowed) until the end of the loan period.

This results in repayments being much lower. However, it is risky as it usually relies on investment of the principal money, which may not appreciate as required.

Fixed-Rate Mortgage

A fixed-rate mortgage has an interest rate that does not change from one repayment to the next. If you sign up for a fixed-rate mortgage with interest at 4%, you will pay 4% of the amount outstanding as interest on all of your repayments for a given period.

After this period elapses, your lender switches your interest rate to a standard variable rate or to another fixed rate. 

Standard Variable Rate Mortgage

A standard variable rate (SVR) mortgage allows a lender to set their own interest rate and change it as they please. Once the initial period of a fixed-rate mortgage is over, many borrowers find themselves operating within this payment structure. 

The favorability of this situation for the borrower varies widely.

Tracker Mortgage

A tracker mortgage has a variable interest rate that tracks a certain benchmark, usually determined by the Bank of England. This benchmark will usually be a publicly-known composite rate, such as LIBOR or EURIBOR.

Every mortgage lender has different rates of interest. Different mortgages from the same lender will also differ in terms of prices; the shorter a mortgage’s term is, the lower its rate of interest will typically be.

While there are variances, however, mortgage rates between lenders generally don’t change significantly. This is because it would make competition impossible for providers with higher rates.

Mortgage rates are closely tied to interest rates in the economy. The Federal Reserve, which is America’s central bank, decides on these, based on economic conditions. When the American economy is struggling, the Fed will lower interest rates to encourage borrowing and increase spending. 

As this data from Freddie Mac shows, mortgage rates have reached historic lows of late. This is due to COVID-19.

As we outlined above, mortgage rates are closely tied to market performance. If the American economy starts to struggle, interest rates may fall again.

Keep in mind, however, that mortgage rates are currently at record lows. While further drops are possible, it is more likely that they will increase than decrease in the long run.

The answer to this question depends, first and foremost, on your income. Someone with average annual earnings of $100,000 will be able to afford roughly twice as large a mortgage as someone with earnings of $50,000.

In general terms, therefore, it is useful to consider mortgage affordability in terms of a percentage of income or overall wealth. A good rule is that your mortgage repayments should not exceed 25% of your monthly income.

You may be interested to know about the tax implications of your mortgage, and whether interest repayments might serve to lessen your financial burden at tax time. The good news is that a tax deduction in respect of mortgage interest does indeed exist.

However, the benefits of the deduction are not as straightforward as you might think. The majority of those with mortgages in America receive no benefit whatsoever from this tax break.

This is because homeowners need to itemize their tax deductions to qualify for the relief. For most people, the standard tax deduction is close to or over their collective itemized deductions. If this is the case for you, you will not be able to benefit from the mortgage interest tax deduction.

Refinancing can be a difficult concept for new mortgagors to get their heads around. What it primarily refers to is paying off an existing mortgage and replacing it with a new one.

There are a few different reasons why you might choose to do this. Generally, it will be done to get more favorable mortgage terms than are possible under a current borrowing instrument.

For instance, you might want to get a mortgage with a lower interest rate than you’re currently on. Alternatively, you might decide that you’d be better off with a variable rate rather than a fixed rate.

An important consideration when you’re deciding whether to refinance your mortgage is money. Unless you’re confident that refinancing will save you money over the long term, you probably shouldn’t bother.

Mortgage refinancing is something of a specialist area. To make sure you’re getting a good deal that will benefit you in the long run, you should go to a financial provider with a track record of dealing with refinancing products.

There are several finance providers who can provide help in this niche of the market. Have a look at all of them before making your decision.

If you manage to save up a lot of money throughout your life, or you come into a large pool of cash through, for example, an inheritance, it may occur to you to pay off your mortgage early. While the idea of being mortgage-free is an inviting one, there are a few things to consider.

Firstly, your mortgage may not be the most expensive debt you have. Unpaid credit card debts or term loans will have much higher interest rates, so you should prioritize borrowings like these ahead of your mortgage.

Another thing you should prioritize ahead of your mortgage is your pension. If you don’t have one, you should start one as soon as possible and put it as much into it as possible.

This is because pensions are very tax-efficient. The more you contribute to your pension, the more money the federal government will give you tax relief.

You should also compare the interest rate on your mortgage to the savings rates currently available on deposit accounts. Does the latter outweigh the former? If it does, your money would be doing more for you by sitting in a savings account than paying off your mortgage. As well as this, some savings schemes offer tax-free returns.

If you have a family to support, you should also consider the adequacy of your life insurance coverage.

However, paying off or overpaying your mortgage is still a good idea if you can afford it. Just make sure that all other priorities are taken care of first, and that you have enough money to keep you afloat if some disaster should strike.

Your credit score is a representation of your borrowing history to date. If you’ve paid back every loan you’ve ever taken out in good time and never been late with a credit card payment, you should have a good credit score, and this question probably won’t apply to you.

However, for a significant percentage of Americans, this is unfortunately not the case. A few mishaps with debt early in life can leave you with a poor score, which can make securing loans very difficult.

Some mortgage providers won’t lend to you, while others will only offer loans with prohibitive terms.

However, that doesn’t mean that getting a mortgage will be impossible for you. There are several options to look into if your credit score is causing problems.

Firstly, consider going to a provider who specializes in lending to those with poor credit scores. These will typically be smaller, less established institutions, but they can still provide you with competitive rates and loan structures.

Failing that, you should try to improve your credit score before you apply for your mortgage. There are a couple of things to keep in mind if you’re pursuing this strategy.

Firstly, be vigilant about all your short-term credit repayments. Be sure to stay on top of your credit card bill each month, and try not to use it in the first place unless you have to.

If you have time to wait before you need to take out a mortgage, consider taking out a term loan. If you can pay back this loan within the required timeframe, it might give your credit rating the boost it needs to make your mortgage application successful.

This is something that may apply to you if you are an older homeowner. 

A reverse mortgage is a way for homeowners to release equity in their homes in exchange for regular payments. This is a popular option among retirees, as it can serve to supplement pensions or other retirement income.

If you take out a reverse mortgage, the amount you borrow becomes payable when you permanently move home or die. In the latter scenario, the executor of your estate will have to make the payment on your behalf.