Thanks to low interest rates, it is easier than ever to fulfill the dream of one’s own four walls. Even the less wealthy can afford the low loan rates for the purchase of a house or apartment. Because it is a large and mostly unique investment in life, interested parties should inform themselves exactly about the requirements of mortgage lending.
What is a mortgage?
Consumers seldom have enough equity to pay their dream property in cash. You need outside capital to finance your home. Real estate buyers borrow the missing funds from a bank. They receive the debt financing in the form of a dedicated real estate loan, building loan or mortgage loan. The building loan is usually repaid over many years in constant installments and secured by a registration in the land register. Borrowers can agree on a fixed interest rate for part of the long term.
What has to be considered in the case of mortgage lending?
Whether buying a used property or new construction – every mortgage requires a thorough planning in advance. Potential borrowers should first calculate how much credit is needed. The additional costs for notary and court, land transfer tax and brokerage commission are added to the purchase price or the production costs of the property. Since many federal states have increased the land transfer tax, you should add about 12 to 15 percent additional costs to the purchase price. Most banks do not finance these costs, they have to be raised from the owner’s equity. If one deducts from the total expenditure the existing credit balance, the financial requirement for the construction project results. Ideally, the real estate buyer brings 20 to 30 percent equity into the financing. The more equity the borrower has, the better his credit rating and the lower his lending rates.
After that is to consider which monthly rate the homebuyer can afford. It is advisable to compare all revenues and expenses and not to forget irregular costs. The monthly loan installment must not be in line with the tenant’s savings as there are additional expenses on homeowners, for example for maintenance, operating costs or housing allowance. A secured income over years improves the credit rating of the lender as well. Also, when determining the monthly exposure, a reserve for unplanned expenditure or annual leave and the creation of reserves can not hurt.
The search for a cheap mortgage lender
With this financial cornerstone data the prospective customer can search for a suitable and favorable financier. Comparisons of credit conditions are essential, the house bank is not necessarily the bank that has the best deal. Borrowers should include direct banks, online financiers and free credit intermediaries in the construction finance comparison. The shorter the term of the building loan, the less money the borrower pays back to the bank. Therefore, it is important to find an amortization rate that will result in a portable rate while still ensuring a speedy repayment. At the end of the fixed interest period, within which the agreed borrowing rate does not change, the loan has not yet been repaid and later a new financing is needed. At low interest rates, it makes sense to choose a long-term interest rate and a high repayment rate to pay off as much as possible and avoid rising interest rates in the future.
Tips for optimal mortgage lending:
- Plan for a financial reserve of five to ten percent of the purchase price for renovation, furniture and unforeseen costs from the outset.
- As a rule of thumb, no more than 40 percent of net family income should be spent on mortgage lending.
- The decisive parameters for the comparison of conditions are the effective interest rates as well as the total repayment costs and the remaining debt at the end of the fixed interest period.
- Special repayments reduce the interest costs of mortgage lending. Free installment changes can also be useful for offspring or temporary unemployment, so they should be negotiated with the loan agreement.