Need for a home loan.
Every person has the dream of owning their own home at some point in their life. But homes are prohibitively expensive. It is a fearful prospect for many to buy a house because its price is many times their annual income. For this reason, there is an essential requirement to take up a house loan or a mortgage as it is called in some countries.
Long tenure vs. short tenure loans.
With some careful financial planning to take care of down payment and a house loan, it is definitely possible to acquire one’s own home. A house loan may be a short-term loan of about 5 years or very long-term loan of 30 years. Most people prefer to buy a property in their mid to late 30s and pay for it over several decades. In this way, they keep their monthly installments manageable and in many cases less than the rent they would have paid for a similar property. However many can only manage to pull together enough resources for a house down payment when they are in the late 50s and avail of a short-term loan with higher monthly commitment.
Home loan is a secured loan.
Loans can be of two types – secured and unsecured. A secured loan means a bank maintains collateral with them and against that asset provides a loan. In case of a house loan, the collateral is the house itself. The bank retains all the original documents related to the purchase of the property with them so that the buyer can never sell the property without informing them. Only when the loan amount is fully cleared are the documents returned to the buyer. At this time the buyer is free to sell his property.
Fixed vs. floating rates.
The interest which is charged on a house loan is fixed or floating rate. To understand it one has first to realize that in every country the central bank which is an arm of the government’s financial apparatus) governs a basic interest rate below which no bank of a financial institution is allowed to lend. This rate rises up and down depending on the economic outlook of the country. Thus as this basic rate known as bank rate increases, all other rates head upwards including floating rate house loan. But a fixed rate house loan stays the same through its entire loan tenure. While it might seem that a fixed rate loan is more predictable, do remember that it is also 1 – 2 % higher than floating rate loan interest. It is better in some ways since one can plan ahead for many years. On the other hand floating rate interests change every 2 – 3 months depending on the bank rate set by the central bank. This is an unpredictable situation, but it also comes down at times and leads to considerable savings.
Reverse mortgage and home equity loans.
A home is a good investment. It is possible to take out a home equity loan which means a loan taken from the bank for meeting a medical emergency or some kind of massive expense after keeping the property as collateral. Such loans are also often used to finance children’s education loans or marriage. Another useful fact to know is that homes can be reverse mortgaged. This means that an aged owner will receive a monthly pension in perpetuity from the bank and in return, the bank will claim the property after his or her death. It is a tidy way of taking care of one’s financial needs at old age.
A home is a need and no longer a luxury and a home loan helps countless people fulfill that dream. Most can pay back a home loan with financial discipline and effort. It helps one to have a roof over ones head instead of paying rent life-long and living insecurely.