Life-Changing Loan: For many of us, a mortgage is the biggest personal financial decision we’ve ever made
Buying your dream home is a big decision in many of our financial lives. In this, the first of a five-part series in Moneywisewe look at what the process entails.
You saved and saved – now the dream is about to come true. One of the most exciting days of your and your partner’s life – your first home.
Now the paperwork, already underway with the approval of your qualification criteria, continues.
There are so many things to review and think about.
You have reached the down payment threshold. While a few lucky people can afford to pay cash, most buyers have to finance the purchase.
Many questions arise, including:
How long should the term of office be?
What is the loan value of the property?
How much can we borrow?
What are the bank’s interest rates, how will we know if we are getting the best rate?
What does the mortgage contract look like (and are there different contracts)?
Who will own the house?
What are the other stipulations?
Can we prepay on principal?
What if the previous owner wants to finance part of the purchase price?
What happens if we miss a payment?
How do we know if we have clear title to the property?
Do local banks offer title insurance?
Who inspects the property?
Should we take out life insurance?
If so, on whose life should it be, one owner, both owners?
How much home insurance should we buy?
How can we track our payments?
What happens if one of us loses his job?
Do we receive a copy of the mortgage agreement before closing?
Should we hire a financial advisor, a lawyer or something else?
What are the closing costs?
Overview of the mortgage contract
While we tend to think of this as a single purchase, there are actually two home sale/purchase agreements.
Process nomenclature. The borrower is called the mortgagor, the lender is the mortgagee. The names come from the old French mortgage, “gage mort”, which means that the agreement dies in the event of repayment or default.
Assignment: the seller transfers the deed of ownership to the buyer for consideration (payment). However, the buyer, or future owner, does not receive the mortgage deed on purchase unless full cash payment is delivered at closing.
Mortgage: The buyer (mortgage debtor or borrower) executes a mortgage with a bank, mortgage company or insurance company, pledging the property as collateral.
The title deed and mortgage charge are registered at the Land Titles Office.
A very important point: the bank (mortgagee or lender) holds the deed until the mortgage is paid off, and since the bank now has a secured interest in the property, it has the right to own the property and sell in case of default.
Another important point to keep in mind is that the person or entity undertakes, when signing the mortgage agreement, to comply with all the conditions set out.
No one, including the lender, wants to see a traumatic default. The mitigating circumstances such as serious illness, underemployment or dismissal, and related matters which were addressed in July 2020 to amend the Consumer Protection Act 1999 to provide more assistance to consumers do not appear not have been enacted by law.
Types of mortgage loan
A mortgage is an amortized mathematical calculation (just like credit card debt – but that’s another article) where the principal of the debt is reduced over time. Stay tuned for a demo in part two.
Fixed rate mortgage: remains the same for the duration of the mortgage contract. Terms can range from 10 to 30 years depending on local lending websites.
Variable Rate Mortgage (ARM): – your payments may go up or down as interest rates change, based on the terms of your individual loan and a benchmark rate index. In a rising interest rate market, an ARM may not be as appropriate as a fixed-term mortgage; however, the reverse, in a falling interest rate market is true, where an ARM may be better suited – for a short-term loan. The takeaway is that ARMs are adjusted based on prevailing interest rates, with the outcome not always being predictable for owners who watch budgets closely.
Ready to build: is usually interest only, providing funds to build the house. In the United States, the term of a construction loan is generally one year, after which a certificate of occupancy is issued. The loan is then converted by the lender into a conventional mortgage, in both principal and interest.
It is absolutely essential that the owner ensures that this conversion takes place! Your author saw where the loan was supposed to convert, but devastatingly, 20 years later, the owner still owed the full principal amount.
Types of legal ownership
• Sole owner
• Joint ownership with rights of survivorship where each party has equal rights to the property which cannot be sold without mutual consent
• Full tenants: generally married couples only
• Tenants in Common: Used frequently when interests in the property are unequal, or with extended families, second marriages, etc.
• In Trust: Assets are transferred to a trust that holds legal title for the protection of the beneficiaries of the trust.
Full ownership : individuals own the property and the parcel of land below it providing more individual control over real estate. Owners still have access to common areas for a fee.
Lease: you own the property inside, but not the land below or the upkeep of the grounds. Typically, a lease accompanies the purchase for 99 years, at which time it must be renewed. Maintenance fees are required for all common areas.
Listen to the podcast accompanying the online version of this article at The Royal Gazette website, which was recorded when interest rates were lower.
This is part one of five, which will also be featured in more detail on the Bermuda Bermy Island Finance blog.
Stay tuned for Part 2 – building equity, amortization and the mortgage process, reviewing contract terms, issues and red flags.
Disclosure: Martha Myron has no connection with a mortgage lender; furthermore, specific terms and conditions will vary from lender to lender; career guidance is recommended.
• Martha Harris Myron is an islander originally from Bermuda with connections in the United States. Author of Bermuda’s first primer on financial literacy – the dawn of a new beginning, and the Bermuda blog – Bermy Island Finance. Contact: [email protected]