Finance home loan mortgage
Buying real estate is not same as buying any grocery item.This is because real estate is very expensive, and few can afford to buy it without taking loans.While it is not necessary for everybody to own a farm for growing vegetables, owning a house is very desirable as otherwise, substantial amount of monthly income will have to be set aside towards rents instead of saving for retirement.In addition, rentals increase annually like the hike in annual salary.This poses a great deal of problem when a person is planning for retirement, because he or she has to provide for this inflationary nature of the rentals.
For a long time, taking houses on rent was cheaper.Therefore, it was not considered very wise to invest bulk of savings in an investment that did not fetch adequate returns.In addition, some people faced financial constraints to buy homes in that period.So the prices of homes did not appreciate as much as they did a couple of years ago.The primary reasons for the sudden upsurge in home prices was
- Rising rentals
- Government policies designed to encourage investment in houses, for covering the demand and supply gap in housing
- Falling interest rates
- Rising disposable incomes
For starters, governments encouraged purchase of homes by offering tax rebates on the amount of interest paid on loans taken for buying a house.Some governments offered these rebates even on the principal component of the home loans.These proved to be great incentives to homebuyers as rebates on rentals are not equally high.
Due to global economic factors, interest rates across the world started slipping.What was once a lenders market soon became the borrowers market.Home loans offer one of the safest lending options because they are sanctioned on mortgage of the homes being purchased with the loan.These underlying properties do not depreciate in value with time, as vehicles do.Nor is there any price volatility in home prices like in stocks.Instead, there is a steady, at times slow, appreciation.Therefore lenders are confident of recovering their principal along with interest and other charges in the event of delinquency.These features of home loans prompted lenders to come up with innovative methods to lure homebuyers.
There are so many home loan products in the market that one can find a loan that may be almost customized to his or her requirements.
For example, there is standardized amortization.In this, the loan is amortized (repaid) over a predefined period, along with interest.The amount is repaid in monthly installments, inclusive of interest and principal.These components keep varying in such a manner that the installment remains equated over the entire home loan tenure.
This may not suit every home loan borrower.At times the borrower does not have adequate income for fetching him the required home loan, even after his or her spouses income is considered, and rental savings after purchasing the home are taken into account.However, the borrower may have a deposit that is likely to mature in a couple of years.If the borrower chooses to wait till the deposit matures, the price of the house goes beyond him.Lenders overcame this drawback by offering a ballooning loan.This type of loan allowed this category of borrowers to purchase the house, and make part repayment when the deposit matured.
Lenders came up with home loans, on which enabled borrowers to pay only interest at the agreed rate till a certain period before starting the amortization of the loan.
Lenders devised novel lending proposals that facilitate not only purchase of homes, but even second homes.Borrowers could take a line of credit on their existing or new home.Alternatively, the borrowers could pay smaller installments in the initial stages, and larger installments as time progressed.This feature enabled lenders to capture the market of young homebuyers, who draw less remuneration in the initial stages and start earning more as the years go by.
Interest rate is the other area that lenders tweaked to catch the home purchasers.While fixed interest rates bearing home loans existed for a long time, the lenders introduced a flexible interest rate home loan.The interest rate in these home loans moves as per an agreed index.Borrowers, who did not want to pay much towards interest, could now take their chances with this flexibility.
Some home loans allow the borrowers to pay to the builder as per the stage of construction.Therefore, the borrower does not start incurring interest on the entire sanctioned loan amount, immediately on withdrawing the first installment.Instead, he or she can release the funds to the builder as per the construction stage and incur interest only on the part of loan amount withdrawn till the entire loan is availed.The equated monthly installments start thereafter.
The above home loan types are just a few examples of the home loans existing in the market.There are many other types of home loans designed to trap the disposable incomes in the hands of the younger population.
Borrowing and repaying from future earnings is also more logical, especially when repayment is in equated installments, because the value being repaid is much less if discounted for inflation during the loan repayment period.Effectively, the borrower could be paying less than what he borrowed if the inflation is higher.
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