If you’re looking to buy a house soon, then maybe it’s time for you to brush up on the knowledge you have about mortgages. But, why? This is important because if you don’t have the funds to purchase a house directly, you’re going to have to opt for home loans, and there are things about home loans that you have to know.
However, the most important thing about it is that it’s a long-term commitment, and if you handle it poorly, you might lose a lot of money on top of losing your home. So what is a home loan, and how does it work?
You might be wondering what’s the difference between a mortgage and a home loan. Well, “mortgage” is an umbrella term for loans used to purchase a home, piece of land, or other types of real estate properties.
Of course, since a home loan is a part of the mortgage’s niche, they work the same as the others. Also, home loans also have its subcategories like FHA mortgage, VA loan, and owner occupied home loan. The borrower would borrow money in which they’ll have to pay the lender over a set period of time along with interest. The property you bought would also be put up for collateral as insurance for the lender.
Speaking of lenders, the interest and loan terms differ from lender to lender, so you’ll have to find one that is most suited to your financial situation. To get approved for a home loan, the borrower must meet several requirements like the required credit score, down payments, etc.
There are two types of home loans based on their interest rates: floating and fixed. As the name suggests, a fixed interest loan is a type of loan that has an interest that doesn’t change according to market fluctuations. However, you might want to know that it’s typically a percentage or two higher than the floating interest.
On the other hand, floating interest loans vary according to the flow of the market but are typically much more affordable than fixed ones. But take note that since it depends on the market, there are times that the interest spikes and becomes much more expensive than fixed-rate loans.
Although fixed-rate loans sound much more attractive financially, many experts say that floating-rate loans are better. One of the main reasons for this is because when the market dips, so will your interest rate, and during that time, you’ll be paying significantly lesser than fixed-rate loans.
But when you’re in a fixed-rate loan, when the market dips, you’ll still be paying for the same interest rate. Not only that, but fixed-rate loans are also subject to revision. Revisions usually invoke a change in your interest rate, which mostly increases your interest rate.
Whether you opt for either a fixed-rate loan or a floating one, take note that you negotiate your rates with your lender. Although the bank usually has the upper hand, you can still haggle for it, especially if you’re a long-time client of theirs. Also, it would help if you have a clean credit history and an excellent credit score.
You can use these things to negotiate with your lender and decrease your interest rate. Also, you can opt to buy a loan at the end of the month since it’s most likely they have a quota they’re trying to fulfill, which makes them much more flexible with their loan terms and interest rates.
The loan to value ratio or simply known as LVR, is the measure of your loan compared to the value of the property you want to buy. This is important because it usually indicates the riskiness of your loan. The higher the LVR is, the riskier your loan will be for lenders. For example, if the value of your property is $500000 and your down payment will be $150000, which is 30%, your loan amount would be $350000, and the LVR would be 70%.
That said, most lenders often require that you pay for Lender’s Mortgage Insurance of LMI when you have an LVR that exceeds 80%. This is to offset the risks and make sure that they can still get their money back if you default. The higher the LVR is, the higher the risk for the lenders will be, which will result in you paying an increased LMI.
If you’re looking to change lenders or loans, take note that if you have already paid for the LMI, you can’t transfer it to another loan or lender, which means you’ll have to pay again, and it has the potential to increase. You can either pay the LMI in full or add it to your loan to be paid off along with the monthly payments.
Of course, the ones listed above are just some of the things you have to know about home loans. There are more, but the ones listed in this article are the most important things you have to know about them. Remember, it’s a long time commitment, so you might want to research more about them.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.