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Choosing a mortgage
Choosing a Mortgage:
How to choose your mortgage and how to choose a mortgage lender

Over the years, the types of mortgages available to consumers have increased dramatically. Competition among lenders has led to marketing campaigns that promote many different lending options which can be confusing when it comes to choosing a mortgage. Generally speaking, once you are able to cut through all of the fluff, you'll have a much easier time making the right decision for your situation.

So, in other words, stick to the basics when shopping around and choosing a mortgage and you'll be able to work out how to choose your mortgage and how to choose a mortgage lender more easily. Here are those basics:

Mortgage cost

This is the single biggest issue when choosing a mortgage. Obviously, you want to keep your costs as low as possible, but, remember, this does not mean keeping your monthly payment as low as possible! We are talking about overall cost here.

When considering cost, then, first of all make sure that you understand interest rates and how they are calculated. Just like with credit cards, a low introductory mortgage interest rate may seem too good to be true—and it probably is. Most of the time, these are simply gimmicks to lure you in. Look instead at the interest rates behind the introductory offer; these will give you a better picture of how much you will repay in the long term. And also, find out how compound interest is calculated.

When considering how to choose a mortgage, bear in mind that mortgage interest is calculated in various ways according to the lender’s procedures. Some calculate interest daily (often called an Australian mortgage), some calculate monthly, and some once a year. The more often interest is calculated, the less you’ll pay back overall, and the more effectively your payments will work.

Mortgage term

The term of your mortgage is the number of years that it will take you to repay your borrowings. Most standard mortgages taken out when you decide on how to choose your mortgage and how to choose a mortgage lender will be set at around 25 years, for example. The longer the term you sign up for, the more you will repay overall. But, longer terms can mean lower monthly repayments, so do weigh up your options here. Can you afford to pay back more in the short-term to cut the life of your mortgage? Or are you willing to pay more in overall interest for lower monthly costs?

Mortgage rates: variable vs. fixed

If, when choosing a mortgage, you take out a loan with a variable rate, then you will not pay a fixed amount every time you make a mortgage payment. Your rate may go up and down depending on market conditions. In this situation, how to choose your mortgage and how to choose a mortgage lender may be based on the rates on offer here. Most US variable rates are set at the ‘house’ rate of interest that every lender has; this is known as the SVR (Standard Variable Rate). The SVR changes when central interest rates (i.e. the Bank of England rate) change. The advantage with the variable rate is that you pay less when interest rates are low, but you pay more if they rise.

Fixed rate mortgages give you a fixed monthly payment for a specific period of time. So, you have the advantage of knowing exactly what your mortgage payment will be every month and it cannot go up while your deal is in place. But, your payment also won’t go down either if central rates fall. When choosing a mortgage, remember that this kind of deal often best suits consumers that need to budget more than those with spare cash to spend on possible rate increases.

Mortgage flexibility

With increased competition among lenders, mortgage flexibility has become an even more important consideration than before when you are choosing a mortgage. Some things to look for when thinking about how to choose your mortgage and how to choose a mortgage lender include your payment terms and overall flexibility.

For example, can you overpay on your mortgage payments when you have extra cash? The ability to make extra payments (and when you can make them without penalty) is also a consideration when choosing a mortgage. Some mortgages won't allow you to do this, so if you think you might have some extra cash once in a while and might want to make some additional payments, make sure you look carefully for this option.

Another area of flexibility includes the ability to convert your mortgage to a longer term or to have an ‘all in one’ account where your income and savings sit in the same account as your mortgage and work to pay off interest quicker.

In summary, although you will have to do your homework when choosing a mortgage, the savings and flexibility are generally worth it in the end for many people. Remember, cost is most important when you consider how to choose your mortgage and how to choose a mortgage lender, but use the competitive market to your advantage to get what's right for you!

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