People who buy their homes don’t always have available cash for it and turn to banks and other financial institutions to finance their purchase. Borrowing money so you can buy your home is a major decision with long term financial consequences that you must consider when choosing the type of loan and lender for it.
Basic parts of a loan
Principal: This is the amount you borrow from the bank or lender
Interest: This is the fee which the lender charges you for the use of their money, expressed as a percentage of the principal.
Term: This is the period when you have to repay your loan, usually between 25 to 30 years for home loans
Repayments: Your debt will be repaid typically on a monthly basis in an amount that covers the interest rate agreed upon and a portion of the principal. These are also referred to as amortizations.
Home loan or mortgage?While both terms are often used interchangeably, a mortgage creates a lien on the property being financed in favor of the lender. When the loan is unpaid at the end of the loan period, the lender will have the right to sell the mortgaged property to recover the money you owe. This is also known as foreclosure.
Fixed rate or variable rate?
In a fixed rate loan, your interest payment will not change for an agreed period, usually 1 to 5 years regardless of interest rate fluctuations that may occur. On the other hand, a variable rate changes—it can increase or decrease according to the prevailing official interest rate. Fixed rate loans offer the best guarantee against price changes in your loan but you won’t be able to reduce your interest payment when the official rate goes down. You can also have a split rate loan which combines the best of both fixed and variable rate loans. With a split rate, you can arrange for a portion, say 80%of your loan to carry a fixed interest rate while the remaining 20% will be exposed to a variable rate.
Factors that will affect your loan application
* your net income
* stability of your income
* other loan payments such as credit card and car loan
* total credit limit
* credit history
* number of dependents
* term of loan
* interest rate
* debt service ratio
Choosing a loan product and finding a lender to finance your home can be time consuming unless you use the services of a finance broker.
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