How to manage your mortgage: best tips and advice!
The word mortgage gives you the creeps? Don't worry! We want to take this feeling away from you and show you how to manage a mortgage.
by Thais Daou
Managing your mortgage can be easy
Many people are perplexed as to how mortgages work. Let alone how to manage one intelligently. First things first, a mortgage is a financial mechanism that can benefit both the creditor and the debtor. When used correctly, of course. So, investing in learning about how to manage your mortgage can result in a win-win type of situation.
Overall, said benefit arises pretty much from the physical guarantee of the property. This guarantee ends up reducing the debtor’s interest payments and risks as well.
However, we would like to emphasize again that, if this mechanism is not used wisely, it can cause some ugly damage. For instance, let us imagine that you have incurred a loan that you ended up not being able to repay it. If that was the case, then you would probably lose your collateral and find yourself in a precarious financial situation.
Moreover, regarding your imaginary creditor, the bank, it is also important that the institution correctly evaluates the value of the property. This way both of you avoid assuming a guarantee with a value lower than the loan granted.
How to manage your mortgage: a 101 guide!
Talking about numbers very shortly, in general, the mortgage rates in the United States fluctuate around 4%. But in some cases, however, the rates drop to as low as 2% per year. As a result, this is one of the main reasons why you should definitely consider learning how to manage your mortgage like a pro. Mortgages in the United States can be far more affordable than in many other countries around the globe.
We do want to emphasize that managing your financial products correctly is of extreme importance. Especially as we are talking about mortgages. You take that you probably recall the 2008 financial crisis, right? Well, unfortunately, it is said that the primary cause of this crisis was mortgages of questionable quality in the US.
Here is the thing: when banks begin lending money to people who have very high credit risks and do not charge high-interest rates, a crisis like this is likely to happen. As a result, large financial institutions can suffer significant losses. Just like in 2008.
That being said, we have prepared the content below so that what can successfully become a win-win situation does not end up becoming financial chaos for any of the parties.
Know the main characteristics of a mortgage
- The role of the property: what makes a mortgage a mortgage is the use of a property as collateral for a debt.
- Who’s the property owner? The property given as security can either belong to the debtor or to a third party, as long as the owner has allowed it. Furthermore, in the event of non-payment of the debt, to pay off the outstanding debt, they will auction said property.
Fundraising is expensive
The cost of borrowing represents the cost of raising funds. The cost of this borrowing fluctuates around each country’s basic interest rate. As previously mentioned, rates in the US can drop to as low as 2% annually. However, some experts even consider this high when compared to other developed countries.
Let us take Germany as an example, where the prime rate is 0%, which allows banks to raise funds at a low cost, thus passing them on to customers at a low cost as well.
Credit risk’s levels
When we talk about developed countries, such as the US, where people’s purchasing power, in general, is higher and the economic cycle is more stable, the good thing is that risks are not that high in comparison to less developed countries. This is due to a series of factors, such as unemployment, inflation, and GDP rates. The higher the risks, the higher the interest rates for the end-users.
Concentration of financial institutions
Banking concentration is another common cause of the high costs of secured financing. Talking about the United States again, the country’s market is dominated by a large number of players of different sizes and shapes. In conclusion, again, the more fierce competition acting in the market, the more the final cost is likely to decrease.
Taxation is a significant burden
Finally, banks and other financial institutions face significant taxation on their lending operations and profits. As a result, they must raise the prices in order to profit from their transactions. This is the most common justification financial institutions give to justify high mortgage rates.
What are the dangers of mortgaging a home?
The main risk of mortgaging a property is the risk of losing the property in the event of non-payment. That is for sure. In the case of a foreclosure, one arrears installment is sufficient for the creditor to have the right to claim the property given as collateral. So, always be cautious before taking out a mortgage. If this property is used as a home, be twice as cautious.
Aside from the risk of losing the property, it is also worth noting that, while it is possible, obtaining a second mortgage will be difficult. Because the creditor will not have priority in the foreclosure of the property’s guarantee, the creditor may simply refuse the property as a guarantee.
Finally, we recommend that, if you decide to move on with a mortgage, make sure it will not impact your budget. If there is a chance that your financial situation is momentarily precarious, the risks of the mortgage will magnify.
Am I prepared to manage a mortgage?
There are times when a mortgage is recommended, and there are times when it is not. This decision, that is, the answer to the question of whether or not you should take out a mortgage, must first consider the benefits and drawbacks included within this decision.
So how can one identify when the scenario that is being presented is beneficial or not? Well, there are a few benefits of going for a mortgage, as you can see below:
- Market value increase: if you are seeking to manage a mortgage because you acquired one in order to renovate a property and, therefore, increase its market value. And if your intention is to remodel your home, consequently increasing its market value and improving this property, a mortgage can also be beneficial. After all, loans are usually more advantageous than a revolving credit card or even an overdraft.
- Investment plans: on the other hand, if your goal is related to investing, you will probably need some initial capital outlay. If this is your case, you will most likely rely on a bank loan so that you can carry out your investments. Therefore, taking a mortgage can be a good option for you to obtain a loan at a lower cost.
- Paying off high-interest debts: also, let us say, for example, that you or your family has active debts with high-interest rates. In that is the case, taking out a mortgage to pay off your debt is also an option. Because a mortgage will your debt at lower interest rates.
The examples above are some of the main benefits that answer not only the question of whether a mortgage is the right path for you. That is, if you see yourself in one of the abovementioned situations, you can rapidly answer yes. But also the question of how to manage a mortgage well. Because a good management strategy is deeply linked to whether the outcome will be a win situation for you.
However, always keep in mind the limits of your budget. As, even in these cases of good outcomes, you must determine whether the loan installment linked to the mortgage fits into your family’s budget. Because, in the end, what matters most is that you do not end up losing the property given as security.
As can be seen, the mortgage concept is still very important to understand. Especially when it comes to financial management. So, remember what we said. First, identify why you need one. Second, compare your needs to your current budget. And, third, study whether the outcome is worth it managing a mortgage.
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