The banks make it look so easy. You fill up a form, submit it along with the document requirements, and you’re home free, right? Not quite. There’s still that matter of getting approved, and afterwards, paying it back. And that’s where you’ll need to watch out for a few things– just to be sure you get it right the first time.
1. You. Are you really ready?
Yes, the first thing you really need to check is you. Are you really up to the life-changing commitment involved in taking on a long-term debt?
Buying a house (and taking out that home loan) requires certain money smarts and maturity– enough discipline to put away around twenty to thirty percent of your salary into savings and investments, every month.
2. The Property
That home you’re buying or building is going to be your loan collateral, so it’s a major factor in determining the loanable amount– or whether you get approved at all.
As a rule, major banks look at how easily properties can be resold (liquidated), which makes it rather hard to get a home loan for properties by unknown developers and bad locations. Also, you don’t want to get stuck on 20-year debt for a home you hate just because it seemed the most affordable. Determine the kind of home you want. Shop around. Find the best one in your price range.
3. The Payments
Monthly Payments – As a rule, if the monthly payment will take up more than 30% of your monthly gross income, you probably won’t get approved.
What about in-house financing schemes that promise really low monthly payments? Chances are, these mean balloon payments— large lump sums due at the end of every year that take up the slack your low monthly amortizations gave you.
Downpayment – Low downpayment schemes can be attractive, but the lower the down, the higher you’ll need to pay monthly. Low down payments also mean having lower equity in your home. If something comes up and you have to sell, having too little equity can mean you’ll still owe money after taxes and other closing costs.
It’s best to save and invest until you have at least 20% of the total price as your downpayment. Not only does this save you money in terms of amount due and interest, you’ll also save more on PMI– the private mortgage insurance banks require for borrowers that have less than 20% equity.
4. Interest Rates and Terms
Fixed rate or variable? 5, 10, 15, 20 or 30 years? Confusing? Here’s a little help.
Variable interest rate loans (also called floating rate loans) change as market rates change. This means monthly payments may fluctuate. Monthly payments of fixed interest rate loan are uniform (fixed) for the entire term agreed, regardless of whether market rates rise or fall.
At first glance, fixed interest rates always look generally higher than variable interest rates, making variable rates look more attractive. But if you prefer consistency and predictability in this economic setting, fixed rates (especially with long loan tenures) are a great choice.
5. The Contract.
The contract will probably be a thick document with a lot of small-type. Nevertheless, read them through. READ VERY CAREFULLY BEFORE YOU SIGN. Go through every line and make sure you understand every point. Feel free to ask your home loan account manager about everything that’s fuzzy.
You’ll want to check the agreements, and search for additional charges like processing fees, late payment penalties and other surcharges. If possible, have an accountant or a lawyer (or both) go over it before you sign.
These days, owning a home isn’t as hard as many might think, especially with better home loans around. So take a look, shop around. You can be a homeowner soon!