The following areas are covered:

Types of Mortgages

There is a wide variety of mortgages available offering various financial incentives. They generally fall into seven categories, each of which has its advantages and disadvantages.

• Fixed Rate Mortgages

  This is the most popular type of mortgage. The monthly payments for principal and interest remain the same for the term of the mortgage. Fixed rate mortgages are typically between 10 and 30 years. The majority of the initial payment goes toward paying the interest incurred on the loan. Once the interest is paid off the remaining payment will begin to pay off the principal.
   

  • Advantages: Your payment remains steady for the life of the loan unlike an adjustable rate mortgage. The rate is guaranteed for the term of the loan offering protection against rising interest rates.
• Disadvantages: Higher initial rate than that of an adjustable rate mortgage. If interest rates decrease your payment will not go down.

• Adjustable Rate Mortgages (ARM)

  An adjustable rate mortgage is a loan where the interest rate is re-calculated at various intervals through the duration of the loan. The re-calculated loan rate is tied to a number of interest rate indexes. Banks track on a margin or spread of two to four percentage points to the underlying index. Most ARMs also offer two built-in caps to protect you from enormous increases in monthly payments. A periodic rate cap limits how much your payment can rise at any one time. A lifetime cap limits how much a rate can rise over the term of the loan. Such caps can also apply to rate decreases. These loans typically begin with an interest rate lower than a fixed rate mortgage. Adjustable mortgages are popular with people that don't plan on owning the property for a long period of time or need to qualify for a loan that is larger than they would qualify for at a fixed rate and they expect their future earnings to increase.

   

  • Advantage: Lower initial payment. Borrowers may be able to buy a more expensive home. If interest rates go down so will the monthly payment.
• Disadvantage: Fluctuating payments making it harder to budget. If interest rates go up so does the monthly payment.

• Convertible Mortgages

  This type of loan is an ARM that can be changed to a fixed-rate mortgage at a specified rate. Your lender may give you one chance, or several to convert. The conversion feature gives you the flexibility to start with a low adjustable rate than lock in a low fixed rate if mortgage rates rise.
   

• Balloon Mortgages

  A balloon mortgage requires a series of equal payments, than a large payment or balloon, at the end of the loan term. The payments on a balloon mortgage generally covers interest only so building equity is slow over time.
   

• Interest Only Mortgages

  This type of mortgage allows a borrower to make payment of "interest only" during a fixed-rate period. After the interest-only period has ended, full principal and interest payments are required as the loan fully amortizes. This loan is for borrowers wishing to lower their monthly mortgage payment or simply wanting to better leverage their home to invest the money elsewhere or to pay off other debt.

   

• First-Time Home Buyer, Impaired Credit and Specialty Mortgages

  There are a variety of flexible mortgage options for low and moderate income borrowers and/or borrowers who are full-time teachers, administrators, police officers or firefighters. These programs are especially attractive to borrowers who:

  • 1) require greater flexibility with credit scores and/or credit histories;
  • 2) have not yet had time to create a full credit history;
  • 3) need to have a greater portion of their income go toward their housing in order to afford homeownership.

• VA Mortgages

  These loans are guaranteed by the Veteran's Administration and are for borrowers with a military service history. They typically offer no down payment on purchases and reduced closing fees on purchase and refinances.

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Repaying your Mortgage

You will need to select a method of repaying your mortgage. This should be given careful consideration. It is vital that a suitable repayment method is in place and that such arrangements are maintained otherwise you could lose your property. There are 2 main methods of repaying a mortgage:

• Repayment Mortgage (Principal and Interest)

  With a repayment mortgage you repay the money you have borrowed, known as "principal", plus the interest charged by the lender over a number of years, or the "term" of the mortgage. Each year the amount owed will decline, but not the payments. Providing payments are made in full, at the end of the term, no further principal is outstanding. This method of repayment is the least risky and is often considered suitable if you prefer to see your mortgage decline each year.

   

• Investment Backed Mortgage ("Interest Only")

  With this repayment method you pay "interest only" to the lender and take out a suitable investment to repay the principal at the end of the mortgage term. An endowment policy is often used to repay the capital although there are other investments to choose from such as pensions. Although not guaranteed, this repayment method is designed to generate a cash sum sufficient to pay off your mortgage at the end of the term, with the possibility of providing a surplus of cash for you. It is essential that suitable arrangements are made to repay the mortgage, otherwise you may be left with a shortfall at the end of the term, for which you as the mortgagee are responsible. It is the customers clear responsibility to ensure that a repayment method is maintained for the duration of and Investment Backed Mortgage.

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Term of Loan

Mortgages are generally taken out over periods between 10 and 30 years. Acceptance, in relation to the term of the loan, is generally guided by the applicants ability to meet the payments within their guaranteed income. The term of the loan will of course effect the level of monthly payments; the shorter the term the higher the payment. Affordability is a vital consideration when selecting a mortgage product and the term of the loan.Special

 

• At the End of a Special Deal

  At the end of a special deal you will usually find that your mortgage reverts back to the lender's standard variable rate. You should be aware of the level of payments at the standard variable rate, as this provides a guide to what you may have to pay in the future. It is however impossible to predict whether your payments will be higher or lower, as it is not possible to accurately predict what interest rates will do in the future. Some lenders make it part of the agreement that at the end of a special deal you must keep your mortgage with them for a fixed period. If you move your mortgage during this period you may incur charges. It will be made clear to you if this is the case.

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• Mortgage Payment Protection

  It should be clear to the client from the outset that their property is at risk if they are unable to continue to make payments on the loan secured against their property. Providing an adequate level of protection against accident, sickness or redundancy is considered most important. Your adviser will be able to inform you of appropriate insurance to provide mortgage payment protection.

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• Paying Your Mortgage Off Early

  Although you take your mortgage out over a specified period, you may wish to repay all or part of the loan early. This could happen, for example, if you receive inheritance or a redundancy payment, you wish to sell your property and move on, or a relationship breaks down. You should be aware that with special deals such as a fixed rate mortgage there is often a penalty if you wish to pay it off earlier than the original term. It is not uncommon for a lender to offer a special deal for 2 or 3 years but impose redemption penalties for the following 2 or 3 years. Such lock-ins will be made clear to you, but if you want a mortgage with low penalties or a short penalty period you should bring this to your advisers attention at the earliest opportunity.

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• Mortgage Related Sales

  There are a number of financial services products which may be offered along with your mortgage. These include:

  • Life Assurance
  • Accident, Sickness and Redundancy Protection
  • Building and Contents Insurance
  • Automatic Payment Withdrawal
  • Bi-Weekly Payment Program

  When being offered such a product you will be given a description of that product and its benefits. It is ultimately the customers responsibility to ensure that all necessary forms of insurance, relating to the property and the mortgage, are in place, although information and guidance will be provided during the process.

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• Fees

  As well as the actual price of your house, there may be additional costs involved in buying a new property; these must be taken into account when you consider the affordability of a new property. These extras could include appraisal fee, surveyor's fees, recording fee, state stamps, legal fees, and any insurances. Depending upon your circumstances you may also incur costs for Private Mortgage Insurance (typically where your loan exceeds 80% of the purchase price or appraisal).

  A mortgage lender will often charge fees for arranging a mortgage. One such fee may be for arranging a appraisal. This is to establish the value of the property and its suitability for a mortgage. The lender may also ask for a application fee or lock-in fee. They may require this to be paid at the time the application is made or they may add it to the loan. Many lenders may also charge a fee for an extra insurance policy called "mortgage insurance". Some, or all of this fee will be used by the lender to obtain mortgage insurance which provides extra security for the lender. Such insurance does not protect you if the property is repossessed and sold for an amount lower than the outstanding mortgage. Should this happen, you remain liable for all outstanding sums including arrears, interest and the lenders legal fees. The charges vary greatly and are dependant on the lender and the size of your loan compared to the value of the property. It should be made clear to you if any such fees are to be paid.

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• Confidentiality

  All of your personal information will be treated as private and confidential. Nothing about you will be disclosed to anyone, unless required by law, where there is a public duty to do so, where our interests require disclosure, or where disclosure is at your request. When you apply to take out a mortgage most lenders will want to know if you have any problems with credit in the past. They will ask about this on the application form, but they will also check your credit history with a credit reference agency. Once a mortgage account is opened they may pass details of your payment record to such an agency.

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• Property Construction

  The construction type of the property is an important consideration when lenders are making their decisions regarding a mortgage application. Standard property construction is generally deemed to be brick and mortar. It is necessary to know at an early stage if the property is of a non-standard construction e.g. manufactured, mobile home, log, etc. This may influence a lenders decision when considering the property as security for the mortgage. If a property is of non-standard construction this does not necessarily mean an application will be turned down. Please provide us with as much detail as you can if the property is non-standard.

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