For most people, getting a home would be the most expensive investment ever made in one's lifetime. That's simple because of the long term financing required.
A home loan (or mortgage loan) is considered a term loan, secured on a property that you purchase. And depending on which part of the world you live in, the lending bank will have first charge on the property, followed by your local government's provident funds board.
Before you go about hunting for a ideal home loan, do consider the following basic factors:
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a) As a general rule of thumb, your requested home loan monthly instalments and other long term debts, such as car loans, etc, should not exceed more than 35% of your gross monthly income (note that by the definition "gross", we are referring to prior deduction for local taxes);
b) Always allow a percentage for foreseeable contingencies, such as a potential increase in your requested bank home loan over the defined loan period;
c) If your state or country you live in allows for government interest free loans, find out what is the limited percentage you can utilize;
d) Remember to factor in the bank's defined overdue interest rate should there be a possibility of you defaulting the current month's loan repayment;
e) In case you're not aware, in the event that if you fail to pay your installments within the stipulated timeframe, the bank has the right to exercise the option of recalling the loan and repossess your purchased property as well; and,
f) In the event of a repossession, and the sales of your property are not able to cover the loan amount and interest from your agent bank, you may be made a bankrupt, should you not be able to compensate on the shortfall amount.
As a general principle, home loans can be classified under two broad categories: Fixed rate loans, and Floating or Variable rate loans. Let's examine the main differences in these two types of loans.
Fixed rate loans as the name implies, indicates that the interest rate is guaranteed and fixed in the first few years on the borrowed principal sum. This is a good option to consider during economic periods where the interest rate is low, or if your want to budget with certainty over the first few years, since the interest rate will not fluctuate nor change, even if interest rates rise or fall during that defined initial period. As such, this form of loan is ideal for newly-wed couples or folks who have just landed a stable monthly based income job. However, do note that after this period, the interest rate will be recalculated to factor existing market conditions.
Floating or Variable rate loans on the other hand will fluctuate in accordance to the economic market. However, before you go assuming that if the market goes down and expect the banks to lower their interest rates, think again! Trends have often shown that banks usually take awhile to adjust the lending interest to home owners downwards, but are often quick to adjust upwards in possible times of uncertainty. And depending on where you live in, banks are usually obligated to inform borrowing parties with a thirty day advance notification before adjusting this lending interest. Likewise, as a home owner, you have the right to re-adjust or exercise your refinancing options.
As a word of consideration, you should speak with the bank only when you intend to shorten your home loan period, rather than if you wish to lengthen it since this will likely have an effect on the overall interest rate and period.
Do visit our link to find out more on how you can further reduce your home loans and other related loans as well.
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