Important Factors To Consider When Comparing Home Loans
Purchasing a house is a crucial decision for anyone. If you are planning to get a home loan for your dream house, you have to check various options to reduce your debt as much as possible.
Taking a look at several advertised home loan rates is a great start, but it isn’t enough for you to get a realistic and true comparison.
Basically, a home loan is the amount of money loaned to you by lenders to purchase your preferred property. In return, lenders use the property you purchase as a security for the loan. It means that if you fail to make loan repayments, lenders have the right to sell your property to settle your debt.
When deciding which home loan is best, you can use this guide to home loans and check out the important factors you should keep in mind when making comparison.
Types of Home Loans
The types of home loans available are one of the factors to consider when making comparison. Basically, there are various types of home loans you must know and these include the following:
● Fixed-Rate Home Loans
As its name suggests, fixed-rate home loans mean that you will need to pay fixed regular repayments for a particular period of time, whether there are changes in the cash rate or economy. Such loans can offer certainty in terms of knowing what your regular payments would be.
More often than not, you can fix the interest rates on this kind of loan for up to 5 years. However, fixed-rate home loans are less flexible compared to variable rate home loans. For instance, you might need to pay fees if you wish to make additional repayments.
● Variable Rate Home Loans
The repayments for variable rate home loans change once the lender adjusts its rate. The main benefit of these loans is that you may pay off your loan as soon as possible without the need to pay any penalties. If you are planning to transfer your loan, it’s possible without the need to worry about loan-break costs. The only downside of a variable rate home loan is that if the variable rate increases, your minimum repayments will also go up.
● Interest-Only Home Loans
This type of home loan is appealing to property investors for the reason that the interest paid may be a tax deduction. But, what makes it different from other home loans is that your repayment covers your loan interest without decreasing the principal. It means that the original amount you have borrowed will not decrease in the long run. In addition, if your home’s value does not decrease or increase, you run the risk that you will not create equity in your home in spite of making payments monthly.
● Split Home Loans
If you prefer fixed-rate home loan but you want the flexibility that variable rate home loan offers, you can incorporate both into one by considering split home loans. You may choose the amount for your repayment at fixed and variable rates. In other words, you may pay off part of your home loan sooner while being able to get protection against any increase in the rate.
One of the common mistakes of those who take a home loan for the first time is not knowing about the interest rates. Make sure that you understand what interest rates are and whether they are suitable for your circumstances.
Basically, an interest rate is the yearly percentage that you’ll need to pay on the mortgage. Finding lenders with low-interest rates will help you save lots of money every year depending on the overall home costs and payment rates.
An interest rate changes daily. So, it is a great idea to review and compare websites before you make your final decision. The average interest rates differ from 3% to 4% of the total cost of home loans.
A comparison rate is made to help any borrowers compare loans much easier. It’s the standardized calculation of what interest rates would be once you added in the fees. This will give you insights about your loan. If the comparison rates are much higher than the interest rates, you can easily tell if there are ongoing or upfront fees. If both rates are very close or the same, it shows that the loan has no ongoing fees and has low setup costs.
If possible, you can get a personalized comparison rate calculation. It’s the same kind of calculation as comparison rates, but more tailored to your loan term and loan amount.
Home Loan Features
The majority of home loans come with several features. So, whenever you are comparing home loans, you should consider the available features. Since you might not need all the features of a home loan, determine which ones can be of great help and make sure that you’re not paying extra for some features you might not use in the future.
It is also important to think of the value of some extras that come with your loan. It might sound like you’re getting a bunch of things for free, but they might not be worthy sometimes.
The common features of home loans include:
● Offset Account
It’s like a savings account linked to your loan. You can withdraw or make deposits from it as you usually do with regular transaction accounts. The only difference is that once you hold money in offset accounts for a long time, you may lessen the interest rate charged on home loans. The longer the period and the higher the balance, the lesser interest you have to pay.
If you like to split your loan into interest-only, variable or fixed portions, this feature can allow you.
If a home loan is portable, you can sell your house and buy a new one without the need to change loans. In effect, your loan will stay the same but your lender may release your current house as security for your loan and replaces it with another new property.
● Free Redraw
You can put extra to your home loan, but you may access your extra cash and withdraw it whenever you want to.
● Pay Extra
Paying extra may help you decrease the amount you borrowed and can also be beneficial to pay off your loan quicker.
There are other features that may be included in home loans. Although extra features may come in handy if they are offered for additional charges, make sure to check if its pros outweigh its cons.
Home Loan Fees
If you want to know how much house you can afford or how much savings you can enjoy, fees can make a difference. There are both upfront and ongoing fees you must compare with other loans. When you are comparing home loans, you must take note of the different fees that lenders may charge.
The common charges and fees are as follows:
● Ongoing Fees
These also referred to as service or administration fees, which are charged yearly or monthly for administrating your home loan.
● Application Fees
It’s a one-time fee that is usually charged by lenders to set up your loan. It is also called establishment fee, set-up fee or upfront fee. If your lender doesn’t charge an application fee, your ongoing fees are much higher.
● Break Fees for Fixed Rate Home Loans
You need to pay a break fee once you decide to break your fixed-rate loan. It may be only quoted once you break the loan, so make sure to discuss this with your lender.
● Redraw Fees
There are loans that offer redraw facilities that can let you take back or redraw extra repayments you have made above the minimum. But, several associated fees may differ from one lender to another.
● Early Termination Fees
You may need to pay this if you payout your loan in full within a certain period of time. However, exit fees are banned in other new loans these days.
Regardless of your chosen lender, other fees may apply. These may include transfer fees and state government registration charges. Whenever you are discussing with different lenders, see to it that you ask what particular fees to the loan you’re interested in and determine how they vary from other lenders.
Home Loan Terms
Aside from the interest rate, you must also compare the different loan terms such as repayment periods, prepayment penalties, discount points, rate lock periods, and insurance costs.
<![if !supportLists]>● <![endif]>MI or Mortgage Insurance
It’s the policy that borrowers need to pay monthly to reduce the risk of the lenders. Without this, you will need a bigger down payment to purchase a house.
<![if !supportLists]>● <![endif]>Rate Lock Periods
These refer to how much time borrowers have to close the loan and get that rate after it’s locked. Longer lock periods are much more valuable compared to shorter ones because longer lock periods enable borrowers more time to complete the process of the loan. Locks that expire may be extended sometimes.
It’s the repayment period or number of years that loan should be repaid.
● Prepayment Penalties
These are the extra sum that borrowers might be charged to pay off the loan early. Home loans with prepayment penalties have lower interest rates.
Credibility and Reliability of Home Loan Lenders
Another important factor you should take into consideration when comparing home loans is the reliability and credibility of your preferred lenders. A good lender can make a huge difference in processing your home loan.
If possible, check the background of a lender. Make sure that it has a good reputation in the industry and offers great home loan services. You must also read the reviews of their previous clients to know if they can provide you excellent service and satisfaction.
When comparing home loans, it doesn’t only revolve around the type of home loans or lenders you should consider. There are other important factors you must prioritize in order for you to save more and choose the right home loan for your needs.
If you are still confused about which home loan is the most ideal for you, it is always best to ask for professional assistance. Home loan experts can help and guide you throughout the process until you have finalized your decision.