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).
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).
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).
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).











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