How does a mortgage work/What do you need to know before you get one/Types, Overview and Payments
Mortgage Work refers to a legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.
When getting a mortgage, it’s very important to consider all the options carefully and know exactly what you’re getting into. Let’s look at some specific questions you should ask yourself before making the final decision, as outlined by the Bank of Italy’s guide to mortgages for buying a house “Comprare casa – Il mutuo in parole semplici”.
The basics: what is a mortgage?
First of all, you should be clear on the fact that the mortgage loan is a medium/long-term loan, which generally lasts from 5 to 30 years. The customer usually receives the entire amount in a single lump sum and repays it over time in monthly instalments, which are either the same every month or which may vary according to market rates. Mortgages are used to buy, build or renovate a property, often a house or apartment.
Questions to ask yourself before you get a mortgage Work
Can I get a mortgage?
Anyone can apply for a mortgage, as long as they can prove that they can repay the amount borrowed over time. For this reason, the bank or lending society will have to assess your creditworthiness, whether you’re able to repay the loan.
How much can I ask for?
In general, the amount of money a lender will give you is based on the value of the property you want to purchase. A mortgage is often around 80% of the property value established on the basis of an independent expert’s report, as well as your credit assessment.
Sometimes banks can grant loans of more than 80% of the value of the property, but in such cases they require more security guarantees and often apply less favourable conditions for the client.
How much can I afford to pay back each month?
Before applying for a mortgage, you should carefully assess your income (and especially the income you expect to have in the future) and determine how much you’re able to pay monthly after deducting normal expenses. As a general rule of thumb, your mortgage repayments shouldn’t exceed one third of your disposable income, and most experts recommend putting aside 28% of your monthly income for your home loan repayments. This is so you can still meet your current expenses, unforeseen ones that may arise in future and deal with any possible reductions in income caused by, for example, illness, accident or dismissal from your job.
How much does the mortgage cost me?
The main component of the cost is interest, which is the remuneration for the loan granted and also depends on the duration of the loan. In addition to interest, there are other costs, all of which are indicated in the General Information Sheet you get along with your mortgage, which explains the main characteristics of the product offered; it is available from the lender and on their website. In addition, there are notary fees and taxes to be taken into account when planning the expenses, but they are only paid once when the contract for the purchase of the house is signed.
What loan contract length suits me best?
The duration of the loan, agreed between the customer and the intermediary and defined in the contract, is one of the main things that determines how much your monthly mortgage instalments will be. The instalment consists of the principal plus interest.
With the same amount of financing and interest rate, the shorter the term, the higher the instalments, but the lower the amount due for interest; the longer the term, the higher the amount due for interest but the less you have to repay each month.
Here is an example:
Let’s take a loan of 150 thousand euro, with a fixed rate of 2.1%. If the duration is 20 years, the monthly instalment is 766 euro and the total interest paid is 34 thousand euro. If the duration is 40 years, the monthly instalment is lower (462 euros), but the total interest paid is higher (72 thousand euros).
This just goes to show that you should do all the sums very carefully and weigh up all your options before rushing into any mortgage deal. You can work out how much your mortgage repayments would be with idealista’s mortgage calculator.