The process of buying a home with the help of a mortgage can get rather complicated.
How does a Mortgage work? What is included in my monthly payments? What types of mortgages exist? How do I qualify for a mortgage? All of these are important questions one might ask themselves when looking to apply for a mortgage to buy a new home. We will tell you the basics of mortgage loans and how to get started applying for one.
How does a Mortgage Work?
A mortgage is a long-term loan offered by banks and financial institutions to assist individuals by financing the purchase of property. The property serves as collateral for the loan, and in the event, payments are not made by the borrower the lender can exercise the right to sell the home.
A Mortgage consists primarily of principal and interest.
The interest is what the lender charges the borrower to borrow the money, or in simpler terms is the cost of borrowing the principal.
The principal is the specified amount of money the homebuyer is borrowing to purchase a home. For example, if you buy a €200,000 home, borrow €150,000 from a lender, and pay €50,000 out of pocket, the principal owed becomes €150,000.
What is Included in my Monthly Payments?
The different types of elements included in the monthly payment of a mortgage can vary depending on the lender, but some of the most common inclusions on top of interest and principal are:
- Mortgage Insurance
o A type of insurance required by some mortgage lenders when a buyer provides a small down payment.
- Homeowner’s Insurance
o Insurance serving as protection from fires, accidents, and natural disasters.
- Property Taxes
o Collected taxes associated with the home held by the lender and used to pay property tax bills.
What Types of Mortgages Exist?
A few different types of mortgages exist for consumers. The most common types in Ireland are:
- Annuity Mortgages
o Most common type of mortgage, also called capital and interest or repayment mortgage. Part of the payment goes towards interest and the rest goes towards capital repayment.
- Interest-only mortgages
o Monthly Payments only go towards interest on the loan.
- Pension Mortgage
o Mortgage is eventually paid off when you cash in a personal pension policy.
- Endowment Mortgage
o Payments are made to both interest and an investment policy known as an endowment policy. At the end of the mortgage the policy can be cashed in to pay off the original borrowed amount.
How Do I Qualify for a Mortgage?
The most important part of qualifying for a mortgage is to be financially stable with an adequate amount of cash on hand and to ensure the capability as a borrower to afford future payments.
Borrowers should be able to provide evidence that:
- Their income is secure and stable.
- They have a good credit history.
- They meet Central Bank’s rule of a maximum mortgage no higher than 3.5 times their normal gross income.
- They have enough cash on hand to afford the initial down payment (10% of purchase price for first time buyers, 20% for second time buyers).
- They have a history of good savings and rent patterns.