- FileA model house in the White Water Housing Scheme in St. Catherine.
Toni-Ann Neita, Staff Reporter
SO YOU are planning to buy your dream house. You figure it will cost maybe about $10 million. If you save $20,000 per month, which works out to $240,000 a year, you will be able to save enough to buy that dream house in 42 years! You will be old and grey by then or, worse, dead and gone. You cannot wait that long to get that coveted roof. So what can you do?
Well, most people do not have a pocket full of money to buy a house, so more than likely you will need help getting your new home. That help for homebuyers usually comes in the form of a mortgage.
Shopping for a mortgage is the first step towards owning a home and perhaps the most daunting, especially if you are not prepared. Once a simple task, the mortgage hunt today is like finding your way through a maze. Why? Because there are now more choices than ever, including mortgage plans that are specifically designed for first time home-buyers with low down-payments and low interest rates.
Contrary to popular belief, finding a mortgage doesn't begin with an application. Education is a better first choice. You may think you know all you need to about mortgages - that a mortgage is a loan of money that enables you to buy a house or other real estate. However, you also need to know how mortgages work and how they can work for you because a mortgage is most likely the largest debt you will ever take on.
How much can you afford?
First and foremost, you must determine how your mortgage payment will fit into your current budget and, to some extent, your future obligations 15 to 30 years down the road.
If you discover too late that you cannot afford the mortgage, you will not only face the possibility of losing the roof over your head, but you could also damage your ability to purchase a home later. It is up to you to take stock of your expenses, both current and projected, to determine what you can comfortably manage each month. Experts suggest that a person's total monthly debt obligations should not exceed 40 per cent of his or her gross income.
Before applying for a mortgage make sure that your personal finances are in good order by paying off as much debt as you can, such as car loans and credit card bills.
The application process is the easy part provided you have gathered documents necessary to prove claims you make on the application. The application will ask for information about your job tenure, employment stability, income, assets (such as property, cars, bank accounts and investments) and liabilities (for example automobile loans, credit-card debt).
Mortgage lingo
Things might get a little complicated when choosing the type of mortgage and trying to understand a few key 'mortgage terms'.
During the term of your loan you will pay back your mortgage by making regular monthly payments that typically have at least two components - principal and interest.
The principal is the original amount of the loan and the interest is a fee that the lender charges you in exchange for loaning you money.
A down-payment is the part of the purchase price that the buyer pays in cash and does not finance with a mortgage. The larger your down payment, the less you will need to borrow. The less you need to borrow the smaller your mortgage payments will be. However, do not make an overly large down-payment if it will deflate your emergency financial 'cushion'.
For many people, especially first-time buyers, the lack of a down-payment is the typical hurdle to home ownership. However, there are now numerous special programmes with low down payments, some specifically designed for first-time homebuyers.
So now, with as little as 10 per cent of the purchase price, you can be on your way to being a homeowner.
The term of the loan the agreed upon period during which you repay your loan and the interest charged will depend on the type of loan you choose.
There are two main types of mortgages: fixed-rate mortgages and adjustable-rate mortgages. Fixed-rate mortgages have set interest rates and, therefore, monthly payments that remain the same over the duration of the loan. Adjust-able-rate mortgages, also known as ARMs, have interest rates that fluctuate with the market over the life of the loan. Thus your monthly payments with ARMs may increase or decrease depending on the market's behaviour.
Which should you choose?
Since ARMs do not offer the stability of a fixed-rate mortgage, why would people choose them?
ARMs are attractive because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM may start out lower than those of a fixed-rate mortgage of the same amount, you can qualify for a larger loan. The chief drawback, of course, is that your monthly payments may increase when interest rates go up. The types of people who typically benefit from an ARM are those that are planning to move or refinance in the near future, people with a high likelihood of increasing their income in later years, and people who need lower initial interest rates on their mortgage to be able to buy a home. How much your payments can increase will depend on the terms of your mortgage.
If you want to make sure that your mortgage payment remains the same each month, then you will want to focus on various fixed-rate mortgages. If you are comfortable with periodic changes to your mortgage interest rate then you may be inclined to consider adjustable-rate mortgages.
Whatever term you choose, fixed-rate mortgages protect you from the risk of rising interest rates. Of course since you are locked into a given rate, you could end up with a rate higher than the going rate should rates fall.
Some mortgage rates in Jamaica are currently below 11 per cent, with various stipulations attached, but most rates are considerably higher.
The next decision is choosing the term that is best for you. If you want to have ended any mortgage debt by the time you are facing your children's tertiary education bills or your own retirement, you may wish to consider a shorter-term mortgage. If your own retirement is years away, you may be less inclined toward a shorter-term loan, preferring to extend payments over a longer period of time through taking, for example, a 30-year mortgage loan.
Longer-term mortgages are easier to obtain and they give you an excellent opportunity to keep your mortgage payments reasonable by making monthly payments over a long period of time. In other words, with longer-term mortgages, the total payments are spread over so many years that your monthly payments are lower than they would be on a shorter-term loan. On a 30-year mortgage, for example, you could end up paying hundreds of thousands of dollars more in interest compared with a shorter term obligation.
A short-term mortgage will let you own your own home, clear of debt, earlier which may be important if you are approaching retirement or have other large expenses to cover such as financing your children's education. However, the monthly payments you make on a shorter-term mortgage will cost you more than those you would make on a longer-term mortgage, for the same total mortgage amount.
In the end, you face higher monthly payments but you will save a significant amount in interest payments over the life of the loan.
A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage.
At the same time, bear in mind that shorter-term mortgages are not the right answer for everyone. Make sure to ask a financial advisor about what loan makes the best sense for your individual situation.
A mortgage is probably the biggest investment decision you will make in your lifetime. Make sure you get good advice and ask a lot of questions so that you can be clear in your mind of what it is you are undertaking.
