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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.
Thinking of Refinancing?
If you are thinking of joining the thousands of Australians who are refinancing loans, there are some important issues to consider.
Reasons to consider refinancing:
? Seeking a better interest rate on your mortgage.
? Creating greater flexibility in your mortgage ? interest-only repayments, credit cards, redraw, better service, lower fees, paying off your mortgage earlier.
? Using the equity in your home to finance renovations, or cash for other investments or business capital.
? Consolidating high interest debt such as credit and store cards, and personal loans into a lower interest loan such as a mortgage.
Things to consider when refinancing:
? Costs associated with refinancing ? for example, early discharge fees if you are in a fixed interest arrangement, application fees on new loans, mortgage insurance, stamp duty (in some states) and so on. You need to work out whether these costs outweigh the saving in interest you?ll make, or how long it will take to recoup them. For example, if you are planning to sell soon, refinancing may not be the right option for you.
? Consider using a mortgage broker ? they can save you time and effort by matching you with the best loan options. Brokers are paid a commission by the lender ? it doesn?t cost you. Many people are concerned that advice may be swayed by the level of commissions, however independent brokers are paid a standard commission with little variation between the lenders.
Refinancing can be a considerable effort ? though it should be less so if you use a broker ? but at the end of the day, if your calculations show you can save money, then it?s a worthwhile exercise.
Increasing the Value of Your Home
For many people, their home is an investment. They purchased it initially, pay off the mortgage, and make improvements in order to increase the value. When it comes time to sell their home, their investment has hopefully increased in value and they will come away having made money.
If you own a home and you want to increase your investment perhaps you need to leverage the value you already have in your home. A UK home improvement loan is available for many homeowners in a variety of amounts and repayment options. That way, you can choose the amount that is appropriate to your needs and match the repayment option to your budget. And since the interest rates are determined by a number of factors including the risk level of the recipient and the repayment period, he lot of control or how much you will pay back and above over the principal.
For example, lets say you want to put an addition on your home but you do not have the cash readily available. Instead, you can shop around to find alone get will give you the money to put the addition on your home. In many cases, the value of your home may increase by much more than the money you spend on your loan. This is called leverage. Its borrowing a little bit of money now to make a lot of money later.
Since this is an investment youll probably want to increase the potential for profit. You can control your eventual profit and number of different ways. Ultimately, you want to get alone to make the improvements but you want to reduce your loan by paying and back as quickly as possible. Obviously, if you had the cash up front, you wouldnt get a loan to begin with. But since you need a loan you accept that you have to pace of interest but you will increase the profits by reducing the interest. One way to do that is by paying down the principal through extra payments which will mean that your home improvement loan will be paid off that much quicker. Another way to increase your profits is by reducing the interest rate on the loan. What will you could do this is by getting a secured loan instead of an unsecured loan. A secured loan is alone that uses the potential of collateral for repayment if you are unable to make your payments. An unsecured loan simply uses your good name as the guarantee youll repay the loan.
So now you have several options to increase the value of your home in a long-term buy borrowing a small amount of money in the short term to help you. Is leveraging the right option for you?
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