Unless you possess millions of pounds, the chances are high that you will need to apply for a mortgage if you ever want to purchase a home. While some are actually afraid of the process and what it entails, the principle behind this financial instrument is actually quite simple. In order for you to make the most appropriate decision when the time is right, it is a good idea to take a look at this concept in greater detail. You can then choose the most appropriate mortgage plan that suits your needs.

How Does a Mortgage Work?

We can think of a mortgage simply as another type of loan. After you have decided upon a home, you will then speak to a lender. This can be an independent firm, a bank or a building society. Depending upon your credit score (more about this later), they will determine whether or not you qualify for the mortgage. Assuming that you do qualify, you will be required to put a certain amount of money down. You will then pay off the remaining balance in monthly increments for a number of years.

Fixed Versus Variable Mortgages

You may have heard of fixed and variable mortgages. What do these terms mean? The basic definition of each is as follows:

  • A fixed rate mortgage signifies that you will know how much your interest payments will be each month, as they never change.

  • A variable rate mortgage is associated with fluctuating rates that are determined by the Bank of England

We should point out the benefits and drawbacks of each. Fixed rate mortgages are excellent due to the fact that you can calculate out your budget for a number of years without having the worry about any unforeseen variables. However, the drawback is that if interest rates fall, you will be paying more every month than you otherwise would.

Variable rates follow the rates set out by central banks. This can prove beneficial if these rates fall, as you are essentially paying less than may have been agreed upon in the mortgage contract. In the same respect, rising rates could cause you to place more money out of pocket to meet your monthly obligations. This is why it is wise to seek the help of a financial professional in order to determine which may be the best option.

Factoring in your Credit Score

Whether or not you will be approved for a mortgage will depend upon your credit score. This is a numerical figure which demonstrates to the lender what type of a risk you are as a borrower. Companies such as Experian and Equifax will often determine these scores based upon your previous borrowing history. 710 is the highest score possible while numbers between 400 and 500 are considered to be excellent. If you have defaulted on loans in the past or made late payments, your score could very well be negatively affected. This is the reason why it is critical to only become involved in financial contracts that you can afford. If you are curious to know your score, all agencies are required to provide you with a real-time figure upon request. Considering that this could very well be the determining factor behind whether or not you are approved for a mortgage, it is a good idea to take a closer look.


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