A home loan has terms that may be easily overlooked—everyone needs a place to live, right? Well, it’s actually a long-term commitment that should be thoroughly examined. By determining what kind of buyer you are, you can easily steer through the complexities of the mortgage world and find the best loan for your needs. Here are five things to consider before getting a home loan.

What Type of Home Buyer Are You?

First-Time Homebuyer

A first-time homebuyer is someone who is purchasing a property for the first time. First things first, you must get pre-approved for a loan to determine how much you can potentially afford. Keep in mind, there are other costs associated with purchasing a home other than monthly mortgage payments.

Investment Property Versus Owner Occupied

The terms on your loan may vary depending on how you choose to use the residence. Do you want to buy the property as an investment or are you going to reside there? This is a question your lender will also want to know, and you may be charged a lower interest rate if the property is your primary residence.

Renovator or Builder

Whether you’re renovating an existing home, or building a new home, a construction loan could be a good option. This loan is structured in a way that releases money only when certain milestones in the building process are complete. The advantage to this it that you only pay interest on the money you’ve been lent so far. 
Construction loans are generally interest-only loans which are then transferred onto a regular home loan when the house is complete. While they are primarily designed for people building a home from scratch, some lenders will offer them to renovators as well.

What Type of Interest Rate Do You Want?

Fixed Versus Variable Interest Rate

Which one do you choose: fixed or variable? This depends on how you want to manage your finances. 
A fixed home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your payments will be each month.

A variable rate is one where the interest rate can and will change over the course of your loan. The upside is that you could have a lower payment, but the downside is the uncertainty.

Split Rate Home Loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you can reap the benefits of both. A split loan is a good option for someone who wants peace of mind and predictability in regards to their loan, but still wants to retain some of the additional features variable loans typically provide.

Typically, split mortgage loans come with a 50:50, 60:40, or 70:30 split between a fixed and variable rate. To decide the type of split you want to do, you have to determine the amount of risk you’re willing to take.

Interest Only Versus Principal and Interest

Most banks require you to pay back both the amount loaned and the interest charged—known as principal and interest payments. However, some lenders will give you the option of making interest-only payments for a limited amount of time. This type of agreement may be attractive to those who are temporarily lacking funds. While interest-only payments are lower on a monthly basis, ultimately they will cost more in the long run. By paying down the principal on your loan, your monthly payments may start high, but they will reduce over time.

Payment Frequency

The frequency of which you make your payments can affect how much you end up paying in interest. Banks calculate the interest owing on a daily basis, so if you choose to pay biweekly instead of monthly, that means for two weeks of each month you’ll be charged less interest. It won’t be a significant amount at first, but over the life of the loan the savings will add up.

Uncover Costs You May Not Know About

Upfront Fees

Upfront fees are charged by your lender when you take out a loan. You can expect to pay an appraisal fee, a lock fee and an application fee.

Break Fees

Break fees are charged if you terminate a fixed-rate mortgage. As a general rule, the more the variable rate has dropped, the higher the fee will be.

Are You Looking For a Flexible Home Loan?

Extra Payments

Extra payments are payments you proactively make into your home loan in addition to your set mortgage payments. This extra money goes towards reducing the amount you borrowed and as a result, will significantly reduce the amount of interest you pay in the long run. Before you sign for a mortgage, check that the terms allow you to make extra payments without penalty.

Lump Sum Payments

Lump sum payments are similar to extra payments, but typically with larger sums of money. The lump sum goes towards the principal of your home and can help lower your overall interest costs. 

Offset Mortgage

An offset account is a deposit account attached to your mortgage which allows you to make instant and unlimited deposits without charge. Some banks will only allow you to partially offset your mortgage, so look for one that enables you to offset all of the interest.

How Much Money Should You Borrow?

Determining how much you need to borrow varies from one person to the next. After deciding on the home you’re interested in purchasing, you’ll need to decide how much of a deposit you can put down, how much you can afford to make in monthly payments and how much you need to borrow. Your loan size will affect how big your deposit needs to be, while your ability to make regular payments will affect your loan size.

If you have questions about home loans, contact the experts at Equity Bank. No matter where you are in life, Equity Bank is here to help guide the way.

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