If you are thinking about owning a home, then this episode is for you. I’ll be talking about mortgages and everything you need to know about getting a mortgage. 

What is a mortgage?

A mortgage is a type of loan that is secured by real estate. Real estate includes a house, a piece of land or commercial building.  If the loan is not secured by real estate, then it is not a mortgage.  All mortgages are loans but not all loans are mortgages. In Jamaica, mortgages are offered by the National Housing Trust (NHT), commercial banks, credit unions and building societies.  

The process of getting a mortgage to purchase land, a house or to build a house starts with getting pre-approved by the NHT or financial institution you hope to borrow from. 

Shop around for the best rates and fees

First of all, you should shop around for a mortgage. A house is likely to be the biggest, most expensive thing you ever buy in your life. You will be committed to making these payments every month for the 25 to 30 years! So you want to get the best deal. Two major terms you want to look out for from a financial institution are the interest rate and the repayment period. Apart from the cost of the property, these are the two factors that will most affect how much your monthly payment will be. The interest rate is the cost to borrow the money, so the higher the interest rate the more expensive the loan will be and the higher your monthly payments will be. 

Commercial banks average mortgage interest rate is 7.5% while NHT offers interest rates between 0% and 4% depending on your income. NHT also allows two applicants to combine their incomes to access loans of up to J$13 million (US$87,000) to purchase houses not being sold by NHT . 

But let’s say you want to buy a property that costs more than $13 million. Well, most financial institutions offer joint financing with NHT. This means that you can borrow from both NHT and the bank. The NHT loan will have a lower interest rate which will help to lower the cost of the mortgage. 

The repayment period also helps to determine how low your monthly payments will be. A mortgage with a repayment period of up to 40 years will have lower monthly payments than a mortgage with a 20-year repayment. period. However, a longer repayment period means you end up paying back more to the bank in the long run because you’ll be paying interest longer. How long a bank or the NHT will give you to repay is also determined by your age. The younger you are, the longer they will allow you to repay. Hint, hint, start early.

Another factor to look at is how much of the purchase price you are seeking. Some financial institutions depending on your ability to repay will offer mortgages that cover the entire purchase price of the property or more. For example Jamaica National offers a mortgage that provides 110% financing. The extra 10 percent can be used to buy furniture or pay closing costs for example. However, you will pay a higher interest rate for this benefit. Other institutions usually allow you to borrow up to 90 or 95% of the purchase price of the house. This means you have to save up that deposit.

 FYI, investing in the stock market can be a great way to save up that deposit faster. Contact an advisor at PROVEN Wealth today to learn how. 

Getting pre-approved

Once you have settled on a financial institution, you will need to take:

1.  Government issued ID 
2. Job letter
3. Two or three most recent pay slips OR financial statements if you are self-employed
4. Proof of address
5. Tax Registration Number (TRN)

 You will be assigned a mortgage officer who will do a pre-interview with you just so that they can know how much you want to borrow and what you will be using the money to do, buy a house, or a piece of land or build.

They will use that information to determine how much you can afford to borrow and your ability to make monthly payments. If you pass the pre-approval process, the financial institution or NHT will give you a pre-approval letter stating how much you can borrow. With this letter in hand, you can look for a property that falls within that price range, well that is if you had not started looking before. Many realtors won’t even show you a property if you don’t have a pre-approval letter because they don’t want to waste their time if it turns out the bank denies your loan. So getting pre-approved saves you that disappointment too. This way you know exactly what you can afford and can look at properties within your budget. 

Before you go into the bank you can check out their websites and use their mortgage calculators to get an estimate of the monthly payments and closing costs.

Once you have identified the property you would like to purchase, and you have your pre-approval, you can make an offer to the seller. Once the seller accepts, you will need to engage an attorney to prepare the sale agreement for the property or the bank will have their attorneys draft the sales agreement on your behalf. 

Financial institutions will also request:

1.  A valuation report, 
2. A copy of the title of the property, 
3. Current property tax certificate, and
4. Peril insurance for full replacement cost of the building. 
5. Some banks also ask for a structural engineer report. The structural engineer examines the house to ensure that there are no major problems. 
6. They may also ask for proof of life insurance. Banks want to ensure that in the event of death, the proceeds of the life insurance policy may be able to cover the remaining mortgage payments. In a previous episode, we discussed the benefits of life insurance. Go back and take a look if you missed it.

The bank will also ask that you pay legal fees, stamp duty fees, a commitment fee and mortgage registration fee; however, this list is not exhaustive. Different banks have different fees.  Once fees are paid and you sign on that dotted line, the bank will go ahead and disburse the loan, then you can move on into your new home.

Second mortgages

This is the process for taking out a first mortgage for your new home.  First mortgage – does that mean there can be a second mortgage or third mortgage? Well in a previous video I spoke about home equity. That deposit that you paid, plus any mortgage payments that you’ve made, represent your equity in the home – meaning, that’s the amount of the property that you actually own. 

If you bought a $10 million home, but you put a down payment of $1 million, and you’ve already made $1 million dollars in mortgage payments, then you own $2 million in equity in that home. The bank owns the other $8 million. But you can use that $2 million in equity as collateral for another loan. This second loan is called a second mortgage. When this is done, you are using your status as a homeowner to unlock value in your property. The new loan can be used to buy another house or build an addition to the house, pay for your kids college tuition, invest in a business, whatever you want it to do.  

Categories: MoneyMondaysJA