When it comes to applying for a mortgage, it is easy for the most financially savvy adult to become lost before beginning the process.
As a young adult interested in becoming a first home buyer, it is important to understand the appropriate home loan terminology. Knowing what everything means will help you to feel a lot more comfortable with the process. Below is a brief definition of the essential property jargon you will need to know before beginning your home loan journey.
Obtaining your home loan
When applying for a home loan, it is important to know just how much money you can realistically contribute to your mortgage each month.
Your local mortgage broker can help you to determine exactly how much money you can contribute towards a mortgage and, in turn, give you an idea as to the total amount you may be able to borrow from a lender.
To work out how much you may be able to borrow from a lender, your local mortgage broker will conduct a home loan pre-approval.
Home loan pre-approval lets you know how much you can borrow from a lender and how much you can spend on a property. This helps you to avoid looking at properties that are out of your price range.
Generally valid for three months, pre-approval can also give you some peace of mind before you hit the pavement in search of your new home.
Once you have found a home that fits within your pre-approved price range, you can make an offer on the property.
If that offer is successful, you will need to speak to your mortgage broker about getting home loan formal approval.
Before your home loan is formally approved and you move into your new property however, it is important to speak with your mortgage broker about the type of home loan you would like.
There are literally hundreds of home loan products on the market, so the key is to find the right one for your needs.
In order to find the right product for your needs, you will need to first identify what your needs are. Ask yourself: do you want a home loan that offers repayment stability, or are you happy to ride the current low rate wave and see where interest rates naturally go?
If you are looking for repayment stability, a fixed rate mortgage may be the ideal option for you. With a fixed rate home loan, your interest rate and monthly home loan repayments will not change throughout your fixed rate period.
On the other hand, a variable rate home loan will move in accordance with changes in the marketplace. So, if interest rates move up or down, so do your mortgage repayments.
In addition to deciding whether or not you want a fixed or variable rate home loan, you will have to decide which mortgage features you want your loan to have.
There are many different features you can have as part of your home loan. One of the most common home loan features is an offset account.
An offset account is a separate account linked directly to your mortgage which can help you to pay off your mortgage faster, as any money in the account is used to offset the interest charged on your home loan.
Once you have decided upon a home loan best suited to your financial situation, your mortgage broker will start the ball rolling on formal approval.
To have your loan formally approved, your chosen lender will want to look at your full list of assets and debts.
In addition, they will look at your ability to service the loan. They will look at your living expenses and income to make sure you can comfortably make your mortgage repayments.
From there, the lender will order a property valuation to determine the value of the property and how much they are willing to lend.
If you are borrowing more than 80% of the property's value, your lender will require mortgage insurance approval from their mortgage insurer.
Lenders Mortgage Insurance (LMI) is an insurance that protects the lender (not you the borrower) in the event that you default on your mortgage.
Once the loan has been formally approved, it will proceed to settlement, which is the day that you officially take ownership of the home and can pick up the keys to your new property.
While the overall home loan process can be quite time consuming and stressful, mortgage brokers are hired to alleviate the stress and find a home loan that is best suited to your needs. Contact your local Mortgage Choice Broker today for a free consultation.