When you want to purchase your first home, or when you need a new car, but you do not have the cold cash for such a purchase, the first thing that comes to mind is to borrow money. There are several ways and means to borrow money and nowadays, borrowing money is no longer limited to bank loans. Nonetheless, lenders need to secure the money they lend, which is why there is a need for a mortgage.
The mortgage is typically defined as a loan scheme wherein the property acquired through the loan is used as a collateral. For instance, a lender and a borrower may agree on a certain mortgage scheme. In this scheme, the lender will shell out an agreed sum that will be paid by the borrower on a specific term or time frame, in certain amounts, which may include the interest rate, or the cost of the loan. In case the borrower failed to comply with the agreed payment scheme, the lender has the right to foreclose the property used as collateral, which can be a house or a car.
There are basically two common forms of mortgages in terms of the rate or cost of borrowing money. These types are the fixed-rate and adjustable rate.
- Fixed-rate mortgage. A fixed-rate mortgage allows the borrower to pay out the loan with the same interest rate throughout the loan period. This type of mortgage scheme is usually long-term, which ranges anywhere from 15 to 30 years.
- Adjustable-rate mortgage. An adjustable-rate mortgage allows the borrower to pay out the loan with a fixed interest for an initial term, which is typically below the market value. However, the succeeding interest rate for the rest of the loan term may increase or decrease without a guarantee.
The Mortgage Process
Find a lender. This is the first step in the mortgage process. There are lenders who offer loans specifically for home-buyers, while there are also lenders who offer loans only for car buyers. In the same manner, there are lenders who offer a wide variety of loans, together with different mortgage schemes and payment options. In your search for money lenders, you may come across Money Archer, which is a platform that compare different money lenders in specific countries. For instance, if you are residing in the US, you can filter your search and the results will be narrowed down to a comparison of US-based lenders.
Pre-qualification. After you find a lender that can offer a competitive loan cost and flexible payment scheme, you need to get pre-approved through a pre-qualification process that determines your loan eligibility. Typically, the lender would need information about your current income and existing debts. This will give them an idea of your ability to pay, and therefore prepare an amount range that you will be eligible to borrow.
Choose a scheme. Once you are qualified for a loan, the next step is to select the best deal in terms of the loan cost and payment terms. Make a list of the different plans offered by the lender and consider if you will be able to make consistent and timely payments based on your income sources. A fixed-rate mortgage scheme may be more suitable for you if you are in your younger years with a fixed source of income.
On the other hand, if you intend to engage in a short-term loan, an adjustable-rate mortgage may be more appropriate and may save you a huge percentage of your loan cost. Furthermore, a lower monthly interest may be offered for long-term loans, but its accumulated value is comparably higher than the total accumulated interest of a short-term loan. Hence, all these factors should be considered in choosing the mortgage scheme.
Processing proper. The next step in the mortgage process is the paper works included in the application. These include all the forms you need to fill out such as loan estimate agreement, apart from the application form itself, as well as the letters you need to submit such as an intent to proceed. You may also be required to submit documents as part of the loan processing requirements.
These documents may be your tax forms or pay slips, which guarantees that you have a stable source of income and that you have the capability to make the necessary payments. You may also be required to submit your bank statements or documents related to any of your supplemental sources of income. Furthermore, these documents may also include the statement of account of your credit card bills, for the lender to verify whether you have a good credit standing. Typically, these required documents may vary, depending on the loan that you are applying for.
Approval and release. The final step in the mortgage process is the approval and release of funds to finance your home or car purchase. This may take some time as the lender needs to ensure that all the necessary documents are completely submitted. There are instances wherein a character investigation is conducted to ensure the borrower’s capability to pay.
Nonetheless, as soon as the requirements needed in the processing proper is completed, with all forms duly filled out, and all documents promptly submitted, the approval and release do not take that long. However, before the release of the funds, you may be required to pay certain processing fees such as lender fees or prepaid interests. In most cases, there are also lawyer fees and application fees. All these need to be settled for the approved funds to be released.
In conclusion, saving up for a purchase, without the need for loans, is still considered the ideal practice. But in our fast-paced environment, this is not always appropriate. Hence, borrowing money for immense purchases such as home-buying or acquiring a new car is more suitable, for as long as you have the means to pay for the amount that you borrowed. Be consistent and prompt in making payments, and before you know it, you are ready for your next big purchase.