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Introduction to Mortgages
Mortgaging your house or any part of your asset is in some cases a legal obligation when it comes to taking a loan. A mortgage can be simply defined as part of your asset being held up in exchange (like collateral) when you’re asking for a loan from banks or any organizational entity.
A home mortgage life insurance is basically held up as part of the legal transaction until you pay off the loan fully along with interest. If someone can’t pay their mortgage on time, it will heavily affect their credit scores leading to difficulty when applying for more loans. A bad credit score stays on your profile for up to seven years- so make sure your mortgage payment is always paid on time.
The policy’s length will determine the number of years you have until you fully pay off your mortgage. In such a case, your house lender is the beneficiary. In case you die, the insurance company will pay off the remaining debt to your broker, NOT your spouse or your family.
People can have a joint mortgage life insurance plan; for instance with their spouse. If both the people die at the same time, the company will cover the mortgage life insurance cost and pay off your house lender. If one of the two people dies, the spouse will have to continue paying.
The primary mortgage which has been lent to you stays there; you have been given an amount which you have to pay with interest in monthly installments. Once you pay the whole loan, that is when you’re officially the owner of the loan.
What if you have another major expense that needs to be taken care of? Maybe a student loan debt or a wedding planned in the next couple of months? It is very much possible that you’re not given another loan because you haven’t paid off your primary mortgage yet.
That is when you have the option of a second mortgage- meaning borrowing against the equity of your home. A second mortgage helps homeowners get a smaller loan against their home equity- which is also known as the home equity loan.
Second mortgages are also to be repaid within a specific period of time, with an interest rate decided upon the beginning of the agreement. The second mortgage interest rate is relatively higher. This is because the borrower is likely to default on the second mortgage, because payment for the first one is the priority. And of course, the second mortgage has to be fully paid before another loan can be obtained against home equity.
Debt-to-income ratio: This metric shows how much debt you already have against your monthly income, and mortgage lenders want it to be less than 43%. That is how you will qualify for a second mortgage.
What is a good Debt-to-Income Ratio?
A good debt-to-income ratio to qualify for a mortgage is around 35%, but lenders prefer that it be below that. And of that total debt, not more than 28% should be going to repay the mortgage loan.
For example, assume your gross income is $5,000 per month. The maximum amount for monthly mortgage-related payments at 28% would be $1,400 ($5,000 x 0.28 = $1,400).
Your lender will also look at your total debts, which should not exceed 36%, or in this case, $1,800 ($5,000 x 0.36 = $1,800). In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.
Debt-to-Income Ratio for FHA Loan
FHA loans, as opposed to conventional loans, are very popular in the mortgage market. They are backed by the federal government, meaning the government gives lenders some guarantee on the loan, making it easier for lenders to trust the borrower.
The lender or banks who give out these mortgages are backed by FHA, which is why they have a downpayment as low as 3.5%. This is what gives lenders an edge even if the borrower defaults on the loan.
A debt-to-income ratio (DTI) is a measurement metric that simply evaluates how much debt you have against your current income. More DTI will reduce your chances of being qualified. The DTI should not be more than 50%, and you’re in the safe zone if it is below 43%.
Mortgage to-Income Ratio Calculator
To calculate how much mortgage you need, there are several ways to calculate the ratio online, for instance websites like Mortgage Calculator help you in giving an estimate of what you should be expecting.
How much you can borrow depends on your credentials and the calculator will give you an even better estimate of what you should expect. It is important to make sure to borrow only what you need, because sometimes premiums are so high that they really shake up your monthly budget.
And before you even begin to pay off the mortgage loan, you’re actually looking for decades of debt and loans that need to be paid. Make sure all your options are properly weighed down before you even look for another mortgage. Also, it is always better to shop around for the best rates and low interest so that your budget isn’t shook to the core.