In a repayment mortgage, the interest rate may be fixed through some or all of the term of the loan, or it may be variable. A fixed rate is a double-edged sword. If it’s high when you start, you are stuck unless you can refinance. If you borrow when the rate is low, you can smile when higher rates inflict pain on everyone else. Why might the initial rate be high? Some lenders add a risk premium because you have a poor credit score. They think you’re more likely to default. Equally, the rate may be low because you’ve taken an adjustable rate mortgage. This starts with a “holiday” period of low instalments and then adjusts up to a new rate to be fixed on the due date. Other mortgages have floating rates so you always pay the current market rate on the loan.
Then consider all those fees, costs and charges payable when you take out the loan. Lenders and their agents take their percentage for originating the loan. The more mortgages they sell, the better their income, which explains why some are dishonest and maximize their earnings without worrying too much about whether borrowers like you can make the repayments. It’s the same when you look for a refinancing mortgage so always do your sums and make sure you can afford to pay all these extras and keep up the repayments.
Never allow yourself to be ambushed. Some lenders or their agents come at the last moment with amended terms for the loan. Never agree to vary the terms to something less favorable. The reason for many of the current wave of foreclosures is that borrowers failed to protect themselves and were bullied into unfavorable loans.
Finally, look carefully at what may be tied into the loan. It is a condition to carry
mortgage insurance or that you take out a life insurance policy to guarantee enough to pay off the loan should you die before the end of the term? There’s nothing wrong with this in principle, but can you choose the insurance company? It’s the same with homeowners insurance for rebuilding costs and contents. Can you shop around to get the best terms, or are you required to buy the policies on offer at a higher premium and so give more commission to the lenders?
