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Home Loans - A Basic Introduction
The most popular method of financing a home purchase is with a
mortgage. This is a loan that is secured over the home. There
are a number of different mortgage suppliers and you will have
to shop around in order to get the best deal. Given that your
home is probably the single biggest purchase you will make in
your lifetime, you must make sure to take the care and attention
that the transaction merits. Mortgage rates can vary greatly
from lender to lender and the amount your rate is set at can
make a huge difference to the amount your repayments will amount
to. Even a small difference in rates could save you thousands of
dollars or allow you to have your home paid off years sooner.
So do your homework.
Fixed or Variable
When looking for the best loan, there are certain terms you will
need to be familiar with. For example, mortgages generally come
as either a fixed rate mortgage or a variable rate mortgage. The
fixed rate loan will keep the same interest rate and monthly
repayment for the whole lifetime or term of the loan. This will
generally be for a period of 10, 15, 20 or 30 years. If the rate
is fixed for a period, such as the first 2 or perhaps 5 years,
and then reverts to a variable rate it is known as an adjustable
rate mortgage or ARM.
When the ARM rate becomes adjustable, it will move up or down
periodically according to a specified market index. These can
include the Prime Rate, the LIBOR or the Treasury Index among
others.
With the adjustable rate, some of the risk of changing interest
rates that would otherwise fall on the bank is transferred to
the borrower. They are therefore cheaper averaging somewhere
between 0.5% to 0.2% lower than a 30-year fixed rate mortgage.
If the rate is particularly volatile or difficult to predict
than a fixed rate mortgage may not even be possible.
In the majority of cases, the savings of an ARM outweigh the
risks of a rising interest rate. Especially where the mortgage
is for ten years or less.
Fees
Lenders may charge various fees when giving a home loan or
mortgage. These include entry fees; exit fees, administration
fees and lenders mortgage insurance. There are also settlement
fees (closing costs) the settlement company will charge. In
addition, if a third party handles the loan, it may charge other
fees as well.
Banks usually charge a valuation fee, which pays for a surveyor
to visit the property and ensure it is worth enough to cover the
mortgage amount. This is not a full survey so it may not
identify all the defects that a house buyer needs to know about.
Also, it does not usually form a contract between the surveyor
and the buyer, so the buyer has no right to sue if the survey
fails to detect a major problem. For an extra fee, the surveyor
can usually carry out a building survey or a (cheaper)
"homebuyers survey" at the same time.
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