Buying a house is a dream that each one of us has at the top-most priority out of all others. A home is something that no person wants to compromise in. A new house can cost you a fortune including your lifelong financial savings along with some financial aids. These financial aids are most home loans which are borrowers from financial firms. Taking a home loan for investing into a property is exhilarating but what can often dampen all this exhilaration is the complicated home loan gobbledygook that gets thrown around. So, if you’re dreading the hassle caused by the home loan mumbo jumbo, the guide below is certainly for you Let dive into it to debunk some common home loan terms.
Loan application fee:
When a borrower applies for a home loan the lender charges them a fee for assessing their home loan application. This charge is known to be the application fee. This a fee that the borrower must payto banks or NBFCs to deal with your home loanapplication. This fee is charged solely for doing business with a potential mortgagee and is nonrefundable irrespective of your loan approval.
After your application assessment, if the lender decides to lend you a home loan, they will provide the borrower with a conditional pre-approval. This conditional pre-approval enables the borrower to start looking for a property and put forth an offer up to the amount specified by the bank. After making an offer, the bank will evaluate the property and once they are satisfied that the borrower is not overpaying for the property. After that is done, the borrower will be provided with the formal loan approval.
Extra repayments facility:
If a borrower avails for a home loan and just make the required monthly repayment, the borrower will end up paying a large amount in interest. But ifthe borrower is savvy and decides to take a loan that comes with the option of making additional payments on top of your regular payments at no extra cost, this will not only savea pile in interestamount but also shorten the tenure of the loan too.
Fixed interest rate:
Interest rates on any home loan can be of two types-
-Fixed Home loan rate:
This type of loan is for borrowers who prefer fixed monthly installments without any changes. People who opt for this type of interest rate are usually on a strict budget and need consistency in the repayment pattern. The only shortcoming of opting for a fixed home loan rate is that it is devoid of the flexibility of switching to other banks or prepayment. It is a locked-in rate and the interest rate will remain just the same over a fixed term which usually lasts for 1-7 years.
–Floating home loan interest rate:
- This is a type of home loan interest rate that fluctuates according to the market trends. The interest rate that the borrower must pay every month may reduce or increase as per the market ongoing trend. The floating interest rate is known for its flexibility in terms of prepayment and bank switching. The floating interest rate is opted by majority of the people nowadays as this is quite feasible and the EMI’s are manageable. The most popular type of home loan rate is a floating interest rate which will change over the life of the loan depending on the economy. In simpler words, it means that if rates go down, you’ll benefit from the lowered repayments but just in case if rates increase your repayments will too. Floating interest rates exhibit a bit of a gamble but generally, they come with some great features like fee-free extra repayments, a redraw facility, and an offset account.
Once the lender removes the conditional approval of the loan and officially approves for theborrower’shome loan. Formal approval will normally happen right afterthe borrower has made an offer on a property and the bank has valued the property.
The banks offering home loan needs to make a profit from lending to you and the main way they do this is by charging you interest on the loan principal daily. The interest rate that is charged is called the headline rate. The interest rate can be checked using the tool of home loan EMI calculator. These home loan EMI calculator give quick and accurate results without any hassle.
Home loan top-up:
Once the borrower has built up a significant amount of equity in your home some home loan lenders will allow you to draw upon that equity to top up your loan that is borrowing more. A home loan top-up can come in handy if the borrower’s purpose is to do things like renovation, buy a new family car or take an overseas trip but don’t want to take out another loan.
What is Loan to value ratio (LVR):
When evaluating a borrower for a home loan, the banks will look at the borrower’s loan to value ratio. This in simpler terms means that the lender will be questioning the percentage of the property value do you need to borrow. The loan-to-value (LTV) ratio is a financial word used by lenders to express the ratio of a loan to the value of an asset purchased.Characteristically, banks will utilize the lesser of the appraised value and purchase price if the purchase is “recent”
Portability of home loan:
If the borrower finds a need to move homes down the track without taking a new home loan. The right option for such borrowers would be to consider looking for a home loan that comes with home loan portability so that when you sell your old home and avail another new one you can keep your existing loan.
When the home loan is approved, the process of paying monthly EMI’s starts. The installment constitutes a principal amount and interest amount. The principal amount is deducted from the loan amount while the interest as we discussed above under “headline rate” is the rate that is charged to you daily by the lender.
- A handy feature if you’ve made additional payments on your loan and then need to access that extra cash due to an unexpected expense like a new family car or home upgrade. It’s worth noting that the various facilities of redraw are usually made available to the borrower’s availing a loan with variable interest rates.
Settlement happens right after the offer has made an offer on a property and the lender them with final approval. The handing over of final payment to the borrower by the lender is known to be the settlement.
This is the fee that the bank charges for evaluating the worth of a property. Evaluation is usually needed when a person is either buying a new property or selling the current one.
So, by considering these charges, you can draw an outline of the home loan procedure and the effort it requires. With facts coming from the right sources and informed decisions can be made. After all, a home is going to be a one-time investment and no compromise should be made in this.