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The dream of owning a home is something that is on just about everyone’s lifetime goal list. It’s one of the things that in some ways signals that we have made it in life and can bring great pride and a sense of accomplishment to many. For many who pursue that dream it can be a confusing undertaking if they are not prepared for the home buying experience. Without a doubt one of the most confusing and often misunderstood parts of the home buying experience is the mortgage process. Sadly, most of us do not have the money to just buy a home outright, so we turn to mortgage lenders to help us finance the home of our dreams.

One of the first things anyone who is interested in owning their own home should understand is the role credit plays in the mortgage process. You are getting ready to ask a lender to make a sizeable loan to you for an extended period of time – often upwards of 30 years. For them to take on this risk, they need to evaluate your creditworthiness – or your ability to pay the money back. They typically look at items such as your credit report which lists how you have dealt with other creditors in the past, your total household income and the price of the home you are willing to buy and where it is located. Based on this information they then decide on whether to extend you the loan and at how much interest.

Interest is an important concept to understand because over the lifetime of the loan you can expect to pay back double the amount of the loan value based on the interest rate – that 150,000 house has suddenly cost you 300,000. Your goal in the mortgage process is to get the absolute lowest interest rate you can.

You also need to know how much house you can afford. Most mortgage lenders typically look for you to spend no more than 30% of your monthly income on house payments. Of course, the longer the mortgage term and the lower your interest the more house you can afford to buy. It is important to buy something you can easily and comfortable afford – the last thing you want to do is find yourself in a crisis situation unable to pay your monthly mortgage payment!

Next, be sure you have saved up a sizeable cash reserve before jumping into the home buying process. You are going to have to pay things such as closing costs (which can be upwards of 5% or more) and pay as much of a down payment as you can to reduce your loan amount as much as possible. You then will want to have a little reserve left over to furnish your new home and take care of any needed repairs – remember, you own it now and it is up to you to repair it if something breaks!

If you are confused about the mortgage and home buying process, don’t feel as if you are alone. Many people share the same concerns and fears as you do. Often times in your community there are local first time home buyer groups that meet with experts from the banking and real estate industry there to answer your questions. Ask your realtor about whether such a group exists and when the next meeting is. The home buying process doesn’t have to be a terrifying experience, and if you come prepared you can win big by getting the best deal possible on your mortgage while getting the house of your dreams.

If you are looking for a home but you know that paying a mortgage will be a severe drain on your finances, then perhaps you should look at getting an interest only mortgage. If you are unsure about what an interest only mortgage is and how it can help you, then this article can provide you with some useful tips on getting an interest only mortgage.

What is an interest only mortgage?

An interest only mortgage is a mortgage where you only pay back the interest on the loan, and none of the capital debt is repaid directly. Once you get to the end of the mortgage term, you will pay back the capital payment in full.

How do you pay back the capital?

Although you dont pay the capital back directly through your monthly mortgage payments, you indirectly pay for the capital. You pay for the capital through an investment fund or other lump sum. So, instead of repaying your mortgage capital each month through mortgage payments, you may monthly payments into an investment fund. Apart from investment funds, the other main ways to pay off the capital are:

Savings
Switching to a repayment mortgage
Another lump sum such as inheritance

What is the advantage of this?

Although you are still making monthly payments into an investment fund, these payments are likely to be a lot lower than the monthly mortgage payments you would pay on a normal repayment mortgage. Your interest only payments will be low each month and so if you cannot afford to pay a lot each month at the moment, an interest only mortgage might be a good idea. Also, the idea is that the money you put into the investment fund will mature and leave you with enough money to pay off the capital at the end of the mortgage term as well as leaving you with some extra money.

Are there risks?

Of course, there are a number of potential risks of getting an interest only mortgage. The first problem is that if you are hoping to pay off the capital by switching to a repayment mortgage later on, you will be paying back a lot more money than if you started on a repayment mortgage. Although you may find it hard right now, getting a repayment mortgage to start with might be a better option. However, the main risk involved with interest only mortgages is that the investment fund you set up will not be enough to pay back the capital at the end of the mortgage term. If you cannot pay back the capital then you could end up losing your home at a time in your life that it will hit you hardest, such as at retirement age.

If you are going to take out an interest only mortgage, make sure that the funding method you use is safe, and that you have contingency plans if the fund is insufficient to pay back the capital. If you do this, then getting an interest only mortgage can be a great way of keeping your payments low whilst you improve your income.

The Council of Mortgage Lenders’ figures are showing a growing trend in interest only mortgages. From January to March 2002, 9% of new mortgages were interest only. Now take the period from October to December 2005, and the amount of new interest only mortgages has risen to 23%. In the same timeframe, the number of first time buyers choosing interest only mortgages has increased from 6% to 15%.

There’s a good reason for this upturn, and that’s because the monthly payments are so much lower than with a repayment mortgage. All you have to do is pay the interest, delaying the repayment of the capital itself until the end of the mortgage term when it is paid off in full.

Getting an interest only mortgage is an easy way to avoid having to change lifestyle habits like eating out and holidays – and having a mortgage is incredibly affordable this way. However, we think that there could be a lot of people in trouble in the future when they realise that they didn’t start saving soon enough for this eventual lump sum payment.

The Financial Services Authority (FSA) have voiced concerns about homebuyers potentially getting an interest only mortgage and not making sufficient provisions to pay off the capital, so as a result mortgage lenders have tightened up the rules on interest only mortgages. Now you need to provide proof of an alternative savings fund to cover the capital, before they will agree to lend you the money. The most common ways to save include pensions and ISAs, regular payment schemes that could potentially save more than the capital required. Of course, they may also fall short. The main danger is that the homebuyer will go and cancel the savings plan once the mortgage has been agreed.

If a borrower decides not to save money to cover the capital, the only option would be to sell the home and then buy a home of less value when the time comes to repay the capital. This is not a scenario that the FSA and lenders want to be faced with, especially as property prices cannot be depended on.

Back in the 1970s and 1980s interest only mortgages were very popular – homebuyers would take out an endowment policy to cover the capital repayment at the end of the term. However, we all heard in the news recently about endowment policies under-performing – many borrowers were not able to cover the capital because of an endowment shortfall. They were considered to be a ‘guaranteed’ way of saving, but they did not fulfil their promise. In a similar way, there’s no way to be sure that an investment product will have performed as well as is needed when it comes to paying back the capital in 20 years time.

As people realised that the endowment policies had under-performed, the whole concept of getting an interest only mortgage with a separate savings vehicle fell out of favour, and now repayment mortgages are the norm. But from the recently published statistics mentioned earlier in this article, it looks like the tide may be turning again. For some people it’s the only option. House prices are too high for many people to be able to afford the full repayment mortgage payments.

So it looks like interest only mortgages will be becoming a lot more popular again, but we think that mortgage lenders could do more to help homebuyers see the other options available to them. For example, a mortgage doesn’t have to be over 25 years – the term can be extended to 30 or even 35 years, which would help lower the payments on a repayment mortgage considerably.

A 25-year repayment mortgage of £125,000 at 4.9% will cost £731.69 per month. Stretch the mortgage over 35 years instead, and the monthly payment is £103.53 less at £628.16. That can make the difference between a mortgage being not affordable and affordable.

Many mortgages now offer the option of overpaying when you can. So just because a mortgage is over 35 years, it doesn’t mean it will take 35 years to pay it off. Many homebuyers move house every eight to ten years as well, so the mortgage never needs to run its full course. It’s then a good opportunity to reassess how much you can afford on monthly repayments.

There are other options too, like a mortgage in which you repay half of the capital on repayment, and the rest at the end. It means you get a head start on repaying the capital, and the mortgage can always be renegotiated if you feel you can afford to pay more each month.

Our most serious advice is this – don’t try and make a decision about something as important as a mortgage without getting advice from a professional first. There are a number of solutions so it is always best to get the whole picture from someone who knows the market well.

The term mortgage in everyday lingo, is used to mean ‘mortgage loan’.The word mortgage has now become the generic term for a loan secured by real property. A mortgage is similar to that of a secured loan. The amount of money lent is slowly repaid in monthly amounts for the length of the mortgage term.

Getting a mortgage is therefore, a huge task for any homeowner. These loans can range from the tens of thousands to the hundreds of thousands of pounds, and impose many different terms and conditions. Finding the best mortgage interest rate available is therefore quite an uphill task, which can eventually save one thousand of pounds over a period of time. The mortgage-lending industry is however, not free from its own share of pitfalls. As the market is inundated with so many different mortgaging options one may quite easily end up choosing the wrong one.

The unsuspecting consumer may be lured to believe that a ‘balloon mortgage’ offers the best mortgage interest rate available. While it is true that in the beginning of this mortgage, monthly payments are quite low, homeowners often find difficulty at the end of the mortgage when they are forced to make a large balloon payment. Balloon mortgages do however, offer some of the best mortgage rates available for real-estate buyers who are looking to turn over the property quickly. Mortgage brokers are usually middlemen between the customer and a lender .The broker needs to look through the market to find out the best mortgage interest rate available.

Types of Mortgage loan: There are two main types of mortgage loans, fixed rate and variable rate interest. With a fixed-rate mortgage loan, the homeowner pays the same amount of interest every month during the lifetime of their loan. With a variable rate mortgage, the homeowner will end up paying different interest rates month-to-month solely depending upon market conditions. Banks and lending companies may use different market indicators to determine your interest rate.

While selecting the best mortgage interest rate one also needs to know that the true drivers of mortgage rates are the investors in the secondary market. A loan when its funded, the mortgage lender that funds the loan which may be a bank, a credit union, or other type of financial institution has the option of keeping that loan on its portfolio or selling it on the secondary market.

When selecting the best mortgage interest rate one needs to see whether it offers you the best return possible. That level of return is to a great extent determined by the current and anticipated condition of the economy. Determining the best loan that requires one to pay the smallest monthly payment possible is equally important as getting the best mortgage interest rate.

Fully equipped technologies are now available which simplify the lending process and ensure the current mortgaging rate is the best for his client. Only by exploring the wide-range of mortgaging options one can decide which one suits hisher purpose. It takes only a little bit of internet surfing, a few phone calls or may be a couple of visits to the local branch to find out and grab the best mortgage interest rate.

Here’s the first mortgage term you should learn – Standard Variable Rate, or SVR. This is the interest rate you will be paying on the total amount you are borrowing. It is usually expressed as a percentage, and is different from an APR (Annual Percentage Rate). An APR includes all costs associated with the loan, such as interest, fees, any compulsory insurances etc.

While interest rates can vary quite widely across the board, all lenders will have a Standard Variable Rate. It’s the default rate for their mortgages, and can provide a good indication of whether they are offering good deals. Comparing different lenders’ SVRs is one way to get an idea of who has lower rates generally – though there will be exceptions to this rule.

This rate fluctuates, going up or down according to the economy and the lender. The biggest factor that effects SVRs is the Base Rate set by the Bank of England. In recent years this has been kept relatively low, and mortgage interest rates have been particularly good for borrowers. However, this could change and you should bear in mind that rates could go up in the future.

Many mortgages start off with special introductory rates, and then revert to the SVR after a set period. These include capped and collared mortgages. There are also ‘fixed rate’ and ‘interest only’ mortgages available, which are covered in more detail further on in the guide. When considering mortgages with special introductory rates, you should also take into account what the SVR is likely to be once your initial period is over. Many mortgages come with the condition that you stick with the same one for several years, even after the special offer period is over. There will often be penalties if you want to change mortgage within this tied period.

Interest calculation, interest charging

Be aware that there is a difference between interest calculation and interest charging. Some mortgages calculate interest daily, which works out as fairer for the borrower as your overall balance is reducing every month, and therefore the interest will be reducing too (even by a tiny fraction, every little helps!). Other lenders calculate interest monthly or annually, although annual calculation should be avoided if at all possible, as you will be paying the same interest for a whole year despite your balance having been reduced by your repayments. You should also ensure that your interest is charge in arrears, rather than in advance.