A mortgage is a type of loan from a lender that allows an individual to borrow a certain amount of money to purchase a house, land, build a house or an estate development. It is paid in regular instalments which include the principle and the accrued interest within the agreed period of repayment.
A mortgage shortens the period to homeownership and allows you to purchase a house as a future investment. Below is a guide that will help you in your mortgage application process.
Types of mortgages
It is important to take time and understand the different types of mortgages before choosing one that best fits your needs. The fixed-rate mortgage has unchanged interest rates throughout the mortgage term and shields you from market fluctuations. Adjustable-Rate Mortgages (ARM) has interest rates that fluctuate overtime. The initial interest rate is relatively low and remains unchangeable but is adjusted a certain period based on an index such as the London Interbank Offer Rate and Central Bank of Kenya (CBK) rate. The best type of mortgage is one that best suits your financial situation.
A mortgage pre-approval is a document from a lender conditionally offering you a mortgage with their terms such as loan amount, interest rate and monthly payments. This a promise that a lender will approve your mortgage application under the outlined conditions. If your financial situation changes negatively then the pre-approval can be voided by the lender. A pre-approval can also give you an edge in the market by positioning you as a serious buyer in the market as it shows that you can secure a mortgage. It also gives you an accurate number of the loan amount you need for your dream house. This will help you while budgeting and saving for your house.
It is important to understand the requirements for loan qualification so that you can evaluate if you are eligible. Lenders typically look at your creditworthiness that is credit history and credit score to assess lending risks and source of income to determine your ability to make regular payments. These factors will influence the mortgage interest rate.
Closing costs and downpayment
Closing costs are extra expenses like legal fees, insurance premiums and taxes incurred at the end of the transaction and are not included in the purchase price. It is important to read and understand the fine print before signing the loan contract so that you can factor the additional expenses in your budget. Downpayment is a percentage of the total purchase price of the property that is paid upfront and lowers your loan amount, interest rate and monthly payments. Most lenders ask a borrower to pay a certain percentage of the purchase price as downpayment.
Interest rates and terms
Interest rates terms have a significant impact on the overall long-term cost of the property. Favourable interest rates can save you money in the long-term. It is important to note that your creditworthiness determines your interest rates. Loan terms and purchase price determine the duration of your mortgage repayment period.
Mortgages help you realise your dream of home ownership. It is important to understand the process so that you can easily navigate the mortgage market and secure the ideal loan for your needs.