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A basic guide to mortgages



Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan.

But after a few enquiries, you soon realise that it’s not so simple after all.

In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages. The list is already extensive enough to baffle all but the most determined.

The most important points are how you pay back the capital you borrow and how you pay the interest on it.

Paying back the capital

You can either pay a little at a time as you go (repayment mortgage) or pay it all off at the end (Endowment, Isa and pension mortgages).

 

  • Repayment mortgages - Each monthly payment pays off a little of the underlying debt, as well as interest on the loan. At the end of the term the mortgage is cleared. 
  • Endowment Mortgages - You use an endowment policy to provide life insurance and save funds to repay the loan at the end of the term (usually 20-25 years). If the investment performs badly, you could face a shortfall on your loan at the end of the repayment period. 
  • Individual Savings Account (Isa) mortgages - These work on the same principle as endowments, but use an Individual Savings Account as the loan repayment method. If your investment performs badly you could face a shortfall at the end of the mortgage term. 
  • Pension mortgages - Are similar to both ISA and endowment mortgages, but work on the basis that pensions (both private and company) provide tax-free cash on retirement. At the end of the mortgage term the loan is paid out of your tax-free lump sum. They are not often used as it can be risky linking pensions to other investments.Paying the interest You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.

     

  • Variable rates - This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point. 
  • Fixed rates - The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit. Very low rates may tempt you, but they can be used to trap you into paying over the odds. See check how long you will have to stay with the lender before you can switch without penalty. 
  • Capped rates - These are fixed, but if rates fall you pay the lower rate. Such deals can be a good buy for budgeting. 
  • Cash back deals - This is when lenders offer money back if you take out a particular product. 
  • Discounted rates - Under this type of mortgage the borrower is offered a discount off the lender’s variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.The 10 key pointsThe government has given homebuyers a list of vital checks to help them find their way through the mortgage maze.

    The government suggests buyers should ask these 10 questions before agreeing a mortgage with a lender.

     

    • How much can I afford to borrow?
      This deals with such questions as “What will the cost be each month?” and “What fees will I have to pay?”
    • How can I tell which mortgage rate is best for me?
    • What is the best type of mortgage for me?
      This deals with how to understand the jargon, such as “What do fixed rate, variable rate, discounted or low-start, and flexible mean?” and “Will this mortgage suit my circumstances now and in the future?”
    • How should I repay it?
      “Why are you trying to sell me an endowment policy, or a pension or an Isa?”, “Why is it best for my circumstances?” and “What commission are you being paid?”
    • Can I make lump sum payments to reduce the size of the loan?
    • Are there any redemption penalties?
    • Does this mortgage come with compulsory insurance?
    • What other charges will I have to pay?
    • What happens if I can’t pay?
    • What about the small print?

    • Posted: October 8th, 2006 under Mortgages.
    Comments: 21

    Comments

    Comment from Sean
    Time: October 8, 2006, 6:10 pm

    Great Article!

    Comment from jerry
    Time: October 8, 2006, 6:38 pm

    “origination points are blah blah blah the cost of blah that you have to pay because of blah blah..”

    i wondered

    you buy a $120,000 house
    give the seller $20,000 down and get a $100,000 mortgage

    mortgage: you get a loan at X% with 2 points

    at ‘closing’ you show up with $2000 to pay your 2 points “to the lender”
    the bank supplies $98,000
    result: the seller gets his remaining $100,000

    how much money did you really borrow from the bank?
    how much did the bank really supply?
    and how much do you owe the bank? not just the 98,000 that the bank supplied but you also get to “pay back”, to the bank, the $2000 that you (not the bank) supplied to purchase the house. not only do you get to ‘pay back’ the money that you never borrowed (but had to supply up front), you get to pay it back with interest!

    don’t you just love points?

    and that was back when things were ’simple’, points are like kindergarten compaired to this other stuff

    Comment from john hager
    Time: October 8, 2006, 7:42 pm

    You got some great advice, the best advice I was given was — Don’t get a loan, if you can’t afford the house on a 15year fixed interest loan - works everytime :)

    I learned a lot on this same subject, over at Little Engine

    Comment from Jon
    Time: October 8, 2006, 10:10 pm

    Nice entry. There a ton of good mortgage articles on FamilyResource.com too.

    Comment from bootmodes
    Time: October 8, 2006, 11:19 pm

    useless drabble, but if you made it to the bottom of the page, you already know this

    Comment from Uncle Roger
    Time: October 9, 2006, 1:01 am

    Um, fixed rate mortgages are most commonly 30 year mortgages — the rate stays the same for 30 years, the amount of time it takes to repay the principal. They are also available for 15, 20, and sometimes longer periods. The 2 to 5 year “fixed” mortgages are really just variable rate mortgages with an initial, fixed period.

    It’s also not true that “Whatever kind of mortgage you start with, it is likely to change to variable rates at some point” — it depends on your mortgage. A 30-year fixed rate mortgage will never have a variable rate, the rate is fixed for the entire life of the loan.

    You also didn’t even touch on the subject of negative amortization or interest-only mortgages.

    I have to say, this is not a terribly accurate or helpful post — for people who don’t know any better, I would even go so far as to say it is misleading.

    Comment from Speller
    Time: October 9, 2006, 1:22 am

    Spelling?
    realise?????

    Pingback from Steve Blog » The great tournament was in full swing
    Time: October 9, 2006, 2:03 am

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Comment from Gareth
    Time: October 9, 2006, 5:15 am

    I would like to mention Offset Mortgages. These are still quite new but I am looking to get one of these when I move house.

    The principal is that you have a standard repayment mortgate, but if you hold your savings with the mortgage lender you can choose to not earn interest on those savings but have it come off your mortgage instead.

    Example:-

    Mortgage of £150,000 and savings of £10,000.

    You can choose to earn interest on your £10,000 savings (probably at approx 4%), or you can take it off your mortgage interest, so the interest charged to you would be on £140,000 and not £150,000.

    As long as your mortgage interest rate is greater than the interest you could earn on your savings, you will benefit. The example above means you could pay your mortgage off 5-7 years early and save tens of thousands in interest.

    If you need a mortgage and know you will be able to generate savings that will add up, then an offset mortgage can save you money.

    Pingback from MoneyVelocity.com » A beginers guide to mortgages
    Time: October 9, 2006, 8:25 am

    […] Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan. Clearly this isnt the case. This is an article explaining the basics of a mortgage.read more | digg story […]

    Comment from MoneyVelocity.com
    Time: October 9, 2006, 8:27 am

    Great Article! I was thinking of writing something like this myself, but you’ve nailed it!

    Pingback from Get Rich Slowly » links for 2006-10-09
    Time: October 9, 2006, 8:40 am

    […] Kirberts Finance Blogg » A basic guide to mortgages This guide is UK based, but the concepts apply to the US, too. Sent in by a GRS reader. (tags: UK mortgage) […]

    Pingback from Olivias Blog » ‘”Buck,” says he, all interested, “I”ll tell you what! I want to
    Time: October 9, 2006, 12:07 pm

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Comment from James Kew
    Time: October 9, 2006, 4:13 pm

    UncleRoger: please note that this article applies to *UK* mortgages. In the UK, rates are very rarely fixed for the entire mortgage term, as they are in the US — this would be a very unusual arrangement. Instead, “fixed” typically refers to the scheme described in the article: a certain number of years at a fixed rate before reversion to the lender’s variable rate.

    Comment from jey
    Time: October 10, 2006, 3:13 am

    would love a basic intro to commercial loans covering things like ammortization (how 10/30 works), direct lender vs banks, securities, payoffs (ym, defeasance, 10 yr. treasury, etc.), resources on where to find lenders for small deals (2-5M), areas of lender’s underwriting that a borrower can negotiate to moderately increase the loan amount, recourse vs. nonrecourse, etc.

    Pingback from Dominic » Grandemont held up the card
    Time: October 10, 2006, 4:05 am

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Pingback from EveryDigg » Blog Archive » A beginers guide to mortgages
    Time: October 10, 2006, 6:24 am

    […] Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan. Clearly this isnt the case. This is an article explaining the basics of a mortgage.read more | digg story […]

    Pingback from Property Malaysia :: A Basic Guide to Mortgages :: October :: 2006
    Time: October 13, 2006, 2:14 am

    […] This is an excellent read about mortgages. The specifics and terms are skewed towards the American real estate industry, but the basic principles are applicable here. […]

    Pingback from A Beginner’s Guide To Mortgages « Mo’ Bettah Marketing
    Time: October 13, 2006, 3:41 am

    […] Confused about pesky mortgages?  Here is an article to help make this simple. […]

    Pingback from The Toms » “I say, ‘Peeg, go!’ How you say? Yes, ‘pop off!’ I say, ‘Peeg, pop
    Time: October 25, 2006, 6:32 pm

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Comment from Mortgage Statement Checker
    Time: January 18, 2007, 7:25 pm

    Thanks for the article. I think its also worth mentioning that once you get your mortgage to check for errors in the interest charges.

    As if the interest you pay back isn’t enough, I was overcharged twice by my lender (came to just over $600 - which they have now refunded!!). I found this in the first 2 years of my mortgage, so if gone un-noticed would have added up to thousands over the life of the loan.

    You can use a spreadsheet to track and check your interest, or just download one of the better mortgage software packages out there. I’ve been using the mortgage checker from http://www.HomeMoneyManager.com which I find good (otherwise just search for “Mortgage Audit Software” to come up with some).

    Write a comment





    A basic guide to mortgages



    Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan.

    But after a few enquiries, you soon realise that it’s not so simple after all.

    In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages. The list is already extensive enough to baffle all but the most determined.

    The most important points are how you pay back the capital you borrow and how you pay the interest on it.

    Paying back the capital

    You can either pay a little at a time as you go (repayment mortgage) or pay it all off at the end (Endowment, Isa and pension mortgages).

     

  • Repayment mortgages - Each monthly payment pays off a little of the underlying debt, as well as interest on the loan. At the end of the term the mortgage is cleared. 
  • Endowment Mortgages - You use an endowment policy to provide life insurance and save funds to repay the loan at the end of the term (usually 20-25 years). If the investment performs badly, you could face a shortfall on your loan at the end of the repayment period. 
  • Individual Savings Account (Isa) mortgages - These work on the same principle as endowments, but use an Individual Savings Account as the loan repayment method. If your investment performs badly you could face a shortfall at the end of the mortgage term. 
  • Pension mortgages - Are similar to both ISA and endowment mortgages, but work on the basis that pensions (both private and company) provide tax-free cash on retirement. At the end of the mortgage term the loan is paid out of your tax-free lump sum. They are not often used as it can be risky linking pensions to other investments.Paying the interest You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.

     

  • Variable rates - This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point. 
  • Fixed rates - The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit. Very low rates may tempt you, but they can be used to trap you into paying over the odds. See check how long you will have to stay with the lender before you can switch without penalty. 
  • Capped rates - These are fixed, but if rates fall you pay the lower rate. Such deals can be a good buy for budgeting. 
  • Cash back deals - This is when lenders offer money back if you take out a particular product. 
  • Discounted rates - Under this type of mortgage the borrower is offered a discount off the lender’s variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.The 10 key pointsThe government has given homebuyers a list of vital checks to help them find their way through the mortgage maze.

    The government suggests buyers should ask these 10 questions before agreeing a mortgage with a lender.

     

    • How much can I afford to borrow?
      This deals with such questions as “What will the cost be each month?” and “What fees will I have to pay?”
    • How can I tell which mortgage rate is best for me?
    • What is the best type of mortgage for me?
      This deals with how to understand the jargon, such as “What do fixed rate, variable rate, discounted or low-start, and flexible mean?” and “Will this mortgage suit my circumstances now and in the future?”
    • How should I repay it?
      “Why are you trying to sell me an endowment policy, or a pension or an Isa?”, “Why is it best for my circumstances?” and “What commission are you being paid?”
    • Can I make lump sum payments to reduce the size of the loan?
    • Are there any redemption penalties?
    • Does this mortgage come with compulsory insurance?
    • What other charges will I have to pay?
    • What happens if I can’t pay?
    • What about the small print?

    • Posted: October 8th, 2006 under Mortgages.
    Comments: 21

    Comments

    Comment from Sean
    Time: October 8, 2006, 6:10 pm

    Great Article!

    Comment from jerry
    Time: October 8, 2006, 6:38 pm

    “origination points are blah blah blah the cost of blah that you have to pay because of blah blah..”

    i wondered

    you buy a $120,000 house
    give the seller $20,000 down and get a $100,000 mortgage

    mortgage: you get a loan at X% with 2 points

    at ‘closing’ you show up with $2000 to pay your 2 points “to the lender”
    the bank supplies $98,000
    result: the seller gets his remaining $100,000

    how much money did you really borrow from the bank?
    how much did the bank really supply?
    and how much do you owe the bank? not just the 98,000 that the bank supplied but you also get to “pay back”, to the bank, the $2000 that you (not the bank) supplied to purchase the house. not only do you get to ‘pay back’ the money that you never borrowed (but had to supply up front), you get to pay it back with interest!

    don’t you just love points?

    and that was back when things were ’simple’, points are like kindergarten compaired to this other stuff

    Comment from john hager
    Time: October 8, 2006, 7:42 pm

    You got some great advice, the best advice I was given was — Don’t get a loan, if you can’t afford the house on a 15year fixed interest loan - works everytime :)

    I learned a lot on this same subject, over at Little Engine

    Comment from Jon
    Time: October 8, 2006, 10:10 pm

    Nice entry. There a ton of good mortgage articles on FamilyResource.com too.

    Comment from bootmodes
    Time: October 8, 2006, 11:19 pm

    useless drabble, but if you made it to the bottom of the page, you already know this

    Comment from Uncle Roger
    Time: October 9, 2006, 1:01 am

    Um, fixed rate mortgages are most commonly 30 year mortgages — the rate stays the same for 30 years, the amount of time it takes to repay the principal. They are also available for 15, 20, and sometimes longer periods. The 2 to 5 year “fixed” mortgages are really just variable rate mortgages with an initial, fixed period.

    It’s also not true that “Whatever kind of mortgage you start with, it is likely to change to variable rates at some point” — it depends on your mortgage. A 30-year fixed rate mortgage will never have a variable rate, the rate is fixed for the entire life of the loan.

    You also didn’t even touch on the subject of negative amortization or interest-only mortgages.

    I have to say, this is not a terribly accurate or helpful post — for people who don’t know any better, I would even go so far as to say it is misleading.

    Comment from Speller
    Time: October 9, 2006, 1:22 am

    Spelling?
    realise?????

    Pingback from Steve Blog » The great tournament was in full swing
    Time: October 9, 2006, 2:03 am

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Comment from Gareth
    Time: October 9, 2006, 5:15 am

    I would like to mention Offset Mortgages. These are still quite new but I am looking to get one of these when I move house.

    The principal is that you have a standard repayment mortgate, but if you hold your savings with the mortgage lender you can choose to not earn interest on those savings but have it come off your mortgage instead.

    Example:-

    Mortgage of £150,000 and savings of £10,000.

    You can choose to earn interest on your £10,000 savings (probably at approx 4%), or you can take it off your mortgage interest, so the interest charged to you would be on £140,000 and not £150,000.

    As long as your mortgage interest rate is greater than the interest you could earn on your savings, you will benefit. The example above means you could pay your mortgage off 5-7 years early and save tens of thousands in interest.

    If you need a mortgage and know you will be able to generate savings that will add up, then an offset mortgage can save you money.

    Pingback from MoneyVelocity.com » A beginers guide to mortgages
    Time: October 9, 2006, 8:25 am

    […] Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan. Clearly this isnt the case. This is an article explaining the basics of a mortgage.read more | digg story […]

    Comment from MoneyVelocity.com
    Time: October 9, 2006, 8:27 am

    Great Article! I was thinking of writing something like this myself, but you’ve nailed it!

    Pingback from Get Rich Slowly » links for 2006-10-09
    Time: October 9, 2006, 8:40 am

    […] Kirberts Finance Blogg » A basic guide to mortgages This guide is UK based, but the concepts apply to the US, too. Sent in by a GRS reader. (tags: UK mortgage) […]

    Pingback from Olivias Blog » ‘”Buck,” says he, all interested, “I”ll tell you what! I want to
    Time: October 9, 2006, 12:07 pm

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Comment from James Kew
    Time: October 9, 2006, 4:13 pm

    UncleRoger: please note that this article applies to *UK* mortgages. In the UK, rates are very rarely fixed for the entire mortgage term, as they are in the US — this would be a very unusual arrangement. Instead, “fixed” typically refers to the scheme described in the article: a certain number of years at a fixed rate before reversion to the lender’s variable rate.

    Comment from jey
    Time: October 10, 2006, 3:13 am

    would love a basic intro to commercial loans covering things like ammortization (how 10/30 works), direct lender vs banks, securities, payoffs (ym, defeasance, 10 yr. treasury, etc.), resources on where to find lenders for small deals (2-5M), areas of lender’s underwriting that a borrower can negotiate to moderately increase the loan amount, recourse vs. nonrecourse, etc.

    Pingback from Dominic » Grandemont held up the card
    Time: October 10, 2006, 4:05 am

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Pingback from EveryDigg » Blog Archive » A beginers guide to mortgages
    Time: October 10, 2006, 6:24 am

    […] Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan. Clearly this isnt the case. This is an article explaining the basics of a mortgage.read more | digg story […]

    Pingback from Property Malaysia :: A Basic Guide to Mortgages :: October :: 2006
    Time: October 13, 2006, 2:14 am

    […] This is an excellent read about mortgages. The specifics and terms are skewed towards the American real estate industry, but the basic principles are applicable here. […]

    Pingback from A Beginner’s Guide To Mortgages « Mo’ Bettah Marketing
    Time: October 13, 2006, 3:41 am

    […] Confused about pesky mortgages?  Here is an article to help make this simple. […]

    Pingback from The Toms » “I say, ‘Peeg, go!’ How you say? Yes, ‘pop off!’ I say, ‘Peeg, pop
    Time: October 25, 2006, 6:32 pm

    […] Kirberts Finance Blogg A basic guide to mortgages […]

    Comment from Mortgage Statement Checker
    Time: January 18, 2007, 7:25 pm

    Thanks for the article. I think its also worth mentioning that once you get your mortgage to check for errors in the interest charges.

    As if the interest you pay back isn’t enough, I was overcharged twice by my lender (came to just over $600 - which they have now refunded!!). I found this in the first 2 years of my mortgage, so if gone un-noticed would have added up to thousands over the life of the loan.

    You can use a spreadsheet to track and check your interest, or just download one of the better mortgage software packages out there. I’ve been using the mortgage checker from http://www.HomeMoneyManager.com which I find good (otherwise just search for “Mortgage Audit Software” to come up with some).

    Write a comment