Understanding Mortgages

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 A mortgage is a loan you take out from the bank for which a piece of the property serves as collateral. This piece of property will most often be your primary place of residence.

That said, you can also take out a mortgage against a second property. This might be an investment property or a holiday home. 

In this case, this property will serve as security for the loan.

As the amount of money you borrow under a mortgage is large, repayment periods are usually much longer than those of normal loans.

Terms of 15 or 30 years are common under standard mortgages. Once you borrow the initial sum of money, you pay it back in regular installments throughout this period. Mortgage repayments usually occur every month.

On top of the amount you borrowed, you will also pay a certain percentage as interest each month. This is how the lending institution profits from the arrangement.

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.

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.

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.

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. 

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 favor-ability of this situation for the borrower varies widely.

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.

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.

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 time-frame, it might give your credit rating the boost it needs to make your mortgage application successful.