Buying a house is probably the financial decision most important thing you will do, or if not at least one of the most important. Surely you have ever wondered, how do people manage to buy a house when they are so expensive and average salaries cannot be considered extraordinary at all? It is true that many people obtain their home through inheritance or life savings, but most people do not enjoy these benefits.
How do they do it then? The answer is simple, and it lies in the Mortgages. If you want to buy your first home and you need to know how mortgages work, I invite you to continue reading, you will surely find an answer to all your questions.
What are mortgages?
We can define mortgage, as a loan that the bank makes you for the total value of the home you want to buy, or most of it, taking the same home as collateral. That is, the bank will lend you the amount you need to buy your house, allowing you to return the money little by little and with some interest in between, and in case you do not make the established payment, the bank can take your house to recover the money invested in you.
In Spain, mortgages to buy a home they are actually home equity personal loans. This means that the owners and guarantors must respond first for the loan, and additionally the mortgaged home. This is how you can see that having a mortgage is a very big responsibility that must always be totally in line with your income, since if not, both the owners and the guarantors of the loan will have to respond with the current assets and futures.
Another way of defining mortgages is as a contract in which the bank gives you the opportunity to buy your house in installments, so it is really useful when you need a home and you have little or no money saved. However, it is for this very reason that mortgages tend to be much more expensive than property value, being able to find you even in cases in which at the end of it you will have paid 80% more than the established value. Even so, they are a specially designed opportunity to acquire a home, so they are much cheaper than common private loans.
How do I know if I am ready to apply for a mortgage?
As mortgages are a commitment that can last for decades, and that carries a huge responsibility, we cannot deny that not everyone should apply for a mortgage. Regardless of the urgency you have to buy a home, it is necessary that you carry out a delicate analysis of your financial situation and your economic stability. It may be that today you can pay the installments without any problem, but will it be the same in 5 years? It is important that you have a stable job, in which you can secure an income with which you can easily cover the cost of your mortgage. Take into account that when you move, new costs will arise that have nothing to do with the mortgage, such as the services of your house or the reforms that may become necessary.
You must have at least 20% of the total property value you want to buy, because the vast majority of companies do not offer more than 80% of the total value of the property. The more you have saved, the better for you, since you will be able to give a good inflow of money at the beginning of the mortgage, significantly reducing the interest that could be generated as well as the time to repay the mortgage.
Never forget that you should not request a mortgage whose monthly value is greater than 30% of your total monthly income. Although most companies do not risk granting you a mortgage under these conditions, doing so would not only be at risk of default, but your financial situation will be affected and it will be much more difficult to make payments.
Another factor that you must take into account to make your financial analysis before applying for a mortgage is the same value of the house. Ask yourself what will happen if in the future you need to sell your house and the mortgage is not paid yet. If the price of your house in the market decreases, and you have to sell it cheaper than you bought it, will you be able to cover the outstanding debt without any problem? Carefully analyze the equity in your home and the possible changes in the market that could damage its value.
It is very likely that you need an endorsement to be able take out the mortgage. The guarantee is that natural or legal person who undertakes to act as a guarantee and be responsible for paying the established fee in the event that the debtor does not have the necessary money to make the corresponding payment. In this way, if you have contracted a mortgage and for some reason you cannot pay it, your guarantee will be responsible for making the payment. That is why you need to have the support of a natural or legal person to be able to contract a mortgage.
A very good advice is that before signing any contract, check with different banking entities until you find the one that offers you the best conditions. Always ask for advice and do not hesitate to ask about any concerns that arise in the process.
Basics to know before applying for a mortgage
If you think that you are in the ideal time and financial situation to apply for a mortgage, it is important that you are familiar with the following terms:
Amount:
The amount is the amount of money that the bank will lend you to buy your home. This usually does not exceed 80% of the real value, but sometimes you can find mortgages with higher values. However, this practice is inconvenient for both parties to the deal, so it is not very common.
Amortization term or amortization schedule.
It is the number of months or years that you will need to return the loan to the bank, which will depend on the total value of your home and the installments you are paying. In general, this does not usually exceed 30 years
Share:
It is known as the installment to the money that must be paid to the financial institution that has granted you the mortgage loan each month. This installment is made up of two parts, the first is all the interest on the loan, and the next is the return of the amount that was loaned to you to buy your house. You can see how within the first years of the loan, most of the installment will be destined to interest. As time passes and you make the payments, the money paid in the installment will be used to pay the loan.
Interests
It is the extra money that you will have to pay to the bank in exchange for the loan of the money. There are different types of interest, and in your contract you must specify what type of interest your loan is under:
- Fixed interest: In this type of loan, the same rate is always applied, so the monthly payment will always be the same from the beginning to the end of the loan repayment
- Variable: In this interest rate, a difference index plus a spread is used, so you will find that the final interest to be paid will be a percentage plus the reference used. Generally, it is reviewed every semester or every year, so the fees will always vary depending on the reference.
- Mixed: both types of interest are combined, generally agreeing a first period of fixed interest and then a variable interest.
Commissions - It is the extra money that you will have to pay to the bank for your mortgage, regardless of the amount or interest. Each bank charges commissions for different concepts, but the most common are the opening, cancellation, amortization and study commissions.
Final Tips - Always check the highest values that the benchmark of your price has taken. It is generally the Euribor rate, but some financial institutions use the Mortgage Loan Reference Index.
- The floor clauses are illegal as of the new legislation, so if you come across one of them, do not accept the contract or ask for it to be removed.
- Nor can they force you to contract any other financial instrument such as insurance or credit cards within the same bank or as a condition to obtain "preferential rates"
- It is preferable to request fixed interest, since with these you will not be in the expectation of knowing the variations in the reference rates.
- If you cannot continue paying your mortgage, you can transfer it to another bank that gives you better payment schemes, as long as you have covered the cancellation fee and leave your paperwork in order.