Home loans are a form of financing intended for persons who want to buy a home. In other words, a home loan is used to purchase a real estate, going with specified rate of interest and repayment period. The lending institution and the borrower may agree that the latter offers collateral (lien on the property) to guarantee the loan. When the borrower repays the loan in full, the lien expires.
When applying for a home loan, it is important to decide on the amount to apply for because high levels of debt make repayment challenging. The loan amount should be based on the borrower’s age, job stability, income, and financial commitments. Another point to consider is the term of the loan or the repayment period. Obviously, opting for a shorter repayment period allows borrowers to pay off their outstanding debts sooner. The interest rate will be higher, but a home loan offered with a longer repayment period may end up costing more in interest charged in the long term. Those who want to repay their loans sooner and are looking into affordable interest rates may choose a middle path, say, a period of up to 15 years.
Finally, those who consider applying for a home loan should think of the interest rate, which can be either fluctuating or fixed. With fixed-interest loans, the rate of interest stays fixed over the term of the loan. Borrowers who choose a floating interest rate expect that the interest rates will fall in the future. Then, there is a hybrid type of loan offered with a combination of floating and fixed rates. This loan is a good option for persons who are confused when it comes to the direction of interest rate movements.
Those who consider applying should keep in mind that depending on their financial institution, different fees may apply. Such fees are, for example, application fees, valuation fees, discharge fees, and ongoing fees. Penalty interest may also apply on fixed-term loans if the borrower opts for early discharge or repayment. When financial institutions offer fixed-term loans they rely on borrowers holding the loan over the entire term as to recoup the costs for extending financing. Thus, breaking the loan early may result in penalty interest. Some financial institutions also charge fees if the borrower chooses to switch from one financial product to another, for example, from fixed rate to variable rate home loan. The fee charged by the financial institution covers the administration expenses. Lending institutions also charge fees for switching to another financial institution. This is in the form of a fee for pre-closure or penalty charge.
Some financial institutions also offer to their clients interest only home loans
. Borrowers who choose this option have smaller payments
to cover over the first couple of years because they are paying the interest only. At the same time, they are not building equity
, and this is particularly important for those who plan to resell. Many people, who opt for an interest only loan, find out that they owe more that the property is actually worth. This is due to plummeting property prices. Another problem is forgetting that the payment will increase when the interest-free period is over. Such borrowers are unable to meet the payments once they come due.