Cheap mortgages
Mortgage is the amount borrowed from a bank or a financial institution to purchase or construct a property. The amount borrowed is then repaid over a fixed period of time together with accrued interest. Mortgage loans are varied type: short tenure ranging from 5to 10 years or spread over a longer period of more than 10 years to 25 or 30 to 40 years in some countries. There are fixed interest rate mortgages, floating rate mortgages or interest rate only mortgages.
A borrower would like to avail a cheap er mortgage loan so that he could afford to pay monthly instalments regularly and without the risk of losing the property mid way because of default. That way he will have no tensions. cheap mortgages are usually offered to people having a good credit rating. It is a deciding factor for applying for any mortgage. The cost of mortgage, the type of mortgage and the tenure of the mortgage are determining factors whether mortgage is cheap er or not.
The mortgage costs consists of two elements, namely; interest rates and loan processing costs
Interest costs: The first step, before opting for any mortgage is to decide between fixed rate of interest and floating rate of interest. Most home loan buyers, especially in India, have taken floating rate loans in the last five years. This option paid them rich dividends as interest rates kept falling down and their cost of borrowing came down from over 12% per annum to, as low as 7%.Not only that, the floating rates are usually 75-100 basis points lower than fixed rates. However, with the steady rise in inflation, the interest rates too have hardened reaching a figure of nearly 13%. Home loan borrowers who went in for fixed rate mortgage are in a happy position with lower cost of borrowing. However, at present lenders in India have stopped offering a pure fixed rate for the entire tenure of the loan.
Loan processing costs are loan related costs. These include the following:
Processing fee: Processing fee is payable at the time of filing loan application. This is non-refundable and is charged to cover the cost of determining loan eligibility of the potential borrower. It varies between 0.5 -1 % of the loan applied for.
File charges: These are document preparation charges. Some lenders charge these to the borrower.
Legal charges: These relate to legal evaluation of housing documents. Some lenders pass on these charges to the borrower.
Administrative fee: This is payable on acceptance of offer that is, after the loan has been sanctioned. This amount again is the same as processing fee: 0.5 to 1% of the loan sanctioned.
Commitment charges: These charges are payable if the loan is not utilized within a specified period of time.
In case borrower decides to shift from one bank to another, because the other is offering better terms, the bank charges a penalty. However, if the loan is repaid, the charge is not payable.
Some banks charge varying rates of interest on the home loan based on the lender's credit rating. It is the fees paid to the lender at the time of sanction of loan. If the borrower has credit problems, the lender can charge points which will increase the interest rate on the loan.
The prospective borrower needs to take the following steps to get the best deal on home mortgage:
There is a steep competition in home loan market. Searching interest specialist websites is the best way to get quotations from lenders available in the market. It is to better to compare the rates of different lenders for the same type of loan product, for example; for 20 year fixed mortgage. Borrower will, then, be able to calculate the total costs including all loan related costs and points, if any, that will be charged by each lender. Lender with the lower overall costs is the most desired option.
Banks in India, offer a host of options for borrowers, such as; step- up and step-down options in home loans. A step-up home loan offers varying equated monthly instalments (EMI) spread over the tenure of the loan. During the initial years of the tenure of the step-up loan, the EMIs are low, making it affordable for young working class. As the years roll by, the EMI outflow increases. Here it is assumed that the borrower, with the rise in his income levels over the years, will be in a position to pay higher EMIs. Step- up loan takes into account the future earning potential of the borrower. In the step-down loan product, the rates are huge initially as borrower can easily afford high instalments. Gradually, as the years roll by, the EMIs will get considerably reduced. Step-down option is suitable to those borrowers who are close to retirement age and has huge earning capacity.
Another option is go in for hybrid loan. In this case, the lenders sanction a percentage of loan in floating terms and the balance in fixed rate terms. The percentage is mutually agreed between the lender and the borrower.
High risk mortgage lenders on the internet offer mortgage solutions to people with bad credit ratings.
As interest rates are on the rise, the borrower can also consider a down payment on the loan to keep the borrowing amount to the minimum.
Not only saving costs, the customer service record of the lender is also equally important.
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