6 Things To Consider Before Taking Out A Mortgage

Sep / 13 / 2016

Taking a mortgage to purchase a home is a major decision; one that can trap you in a cycle of never-ending payments deep into retirement or one that would make your retirement a pleasant one. How would I know which would lead where you ask? Well, we have taken time to go into the not-so-small matter of mortgaging and have come up with these 6 things to consider before taking out a mortgage.

What type of mortgage loan do you want to take?

Are you taking the mortgage as a first-time home buyer, releasing equity in your current building to improve your liquidity position or to complete a building you are currently constructing? Do you need it to renovate or expand your building or you want finance for constructing a building? It is important to know the type of mortgage loan to go in for that best suits your purpose.

Can the house plan be modified?

When planning to take out a mortgage you should take a look at the building drawings, and if you don’t have the eyes to, get a building professional on board to advice. This is particularly important as real estate agents may parade a building as expandable but once you try to expand you may realize that this is not the case. It would normally lead to doing more extensive work than expected to make desired changes to your building. Is the house engineered properly to handle large volumes of water during the rainy season? In the case of a fire hazard, is the building properly designed with enough exit points if any?

What does the land title look like?

It is important to know what kind of title the land on which a building you want to purchase or build has. If it is your land, is the title absolute? For a real estate company, do they hold full title to the land? If this is not done you may end up in the middle of a land dispute. It is also extremely critical to know the length of the lease in a case where the land is properly titled. You don’t want to end up spending a fortune on purchasing a house or putting up a building on land with a lease expiring in the next 5 or 10 years! The survey of mortgage lenders indicated that most housing and other landed property in Ghana are not properly registered and hence transfer of title becomes impossible.

Is the mortgage rate adjustable or fixed?

Do you choose a fixed-rate or an adjustable (or a floating) rate mortgage? Fixed-rate mortgages are mortgages whose interest rates across the life of the mortgage remain the same as opposed to adjustable rate mortgages whose rate can be adjusted through the life of the mortgage. Adjustable rates can be attractive because the advertised rate is normally lower than a fixed rate.

Adjustable rate mortgages often start with a "teaser rate". This is an artificially low rate which will get adjusted higher at the first adjustment opportunity. If you do consider an adjustable rate, be sure to ask what the rate is based upon (often a current T-bill or LIBOR rate plus an additional amount); Get complete details. You would also want to find out what the rate would be today if you already had the loan and it adjusted to current levels. Finally, find out how low or high the rate can go from present and how often the rate can be adjusted.

Here are three reasons to consider an adjustable rate:

  1. If you know for certain that interest rates can't go up from current levels
  2. The loan ceiling on the adjustable rate is below the current fixed rates
  3. You plan to sell your home prior to the first rate adjustment

Be sure you fully understand each of these parameters, and get them in writing. Note: if you can't afford the loan ceiling and the fully amortized payment at that level, don't accept the loan.

Your Income Level

What amount are you looking at taking out as a mortgage? This is important because you will have to look at your possible amortization over a number of years and ask yourself if you will be able to live comfortably as an individual and/or with your family. Will it mean certain crucial activities will have to be stopped or it will only mean cutting of some of your luxurious habits? Can you make down payment without having to borrow more? Making a down payment higher than the required without borrowing helps to lessen the stress on your income over the period of the repayment. It is suggested that if you make just the minimum payment, by the time you get to the end of the 2nd year you will be owing more than what the home is actually worth! Another suggestion will be to save up enough money to make the down payment and the interest cost over the life of the mortgage upfront.

Always pay at least the full interest payment, and it's best to make a regular payment which includes both principal and interest. Preference for mortgages with respondents with low incomes was very low obviously because such income earners cannot qualify for a mortgage to purchase even the cheapest housing unit.

Do you have legal advice or a lawyer?

It is absolutely necessary to have legal advice, not just legal advice, but good legal advice! Reading through the terms of a mortgage arrangement can be extremely tricky for people with no legal knowledge. Do not assume the bank or financial institution ‘has your best interest at heart’; they don’t! There may be some implied clauses that could complicate things for you, so, make sure you have good legal advice. There may also be loopholes that you could exploit to gain more favourable terms and conditions but which would not be readily observable by someone with little or no legal knowledge. Items of particular note will be conditions attached to time frame within which you are expected to make scheduled payments, the penalties, transaction fees, the method of interest calculation, the constituents of a shortfall or default as well as the insurance requirements.

We hope that this post is helpful in making the choice on whether or not to take a mortgage facility.

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