How do mortgages work?

If you’re looking to buy a home, you’ve probably already realized that this is not like most transactions. The average house price in Dublin is €396,000, and unless you’re very wealthy, you probably don’t have anywhere that much in savings. Because you likely can’t afford an expense of this magnitude out of your own pocket, you will need to finance the purchase through a mortgage, and if you’re new to the home-buying process, you may be a little confused as to how exactly these loans work.

A mortgage is a huge loan secured against the value of your house. A “secured” loan means that the borrower promises collateral to the lender in the event that they are unable to make payments, and in this case, the collateral is your home. In other words, the bank will kick you out and take possession of your house if you can’t make payments. In order to prevent this from happening, the lender will typically conduct a detailed review of the borrower’s finances in order to determine how much they can reasonably afford to pay back. So, you will be more likely to get approved for a mortgage if you have a decent amount of savings and a reliable and steady income.

When you borrow the money, you will first put down a deposit, usually at least 10% of the purchase price of the home, and you now own that percentage of the house outright. The bank technically owns the rest. You will then start paying the loan back in small chunks, usually over many years. The amount you have borrowed is called the principal. As you pay off the principal, the percentage of the home that you actually own slowly increases. When you eventually pay off the entire loan, you own 100% of the house.

However, lenders have to make money too, so they charge interest on the loan. Your interest rate is affected by many things, including the market interest rate and the risk taken on by the lender when they loan you the money. If you have a lot of red flags in your finances and a poor credit score, your interest rate will be higher. The interest is usually incorporated into your monthly payments. Generally speaking, at the beginning of your repayment period, most of the monthly payments will be interest. As you continue to pay off the principal, the amount you owe will get smaller, and thus so will the interest. Because your interest payments decrease over time, so will your total payments. However, if you keep your monthly payments the same throughout the lifetime of your loan, you will be able to pay off the loan sooner, as the portion of your payment that represents the actual principal will be constantly increasing over time.

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