Published: January 23, 2018 | Updated: June 15, 2020 | Posted by: Munmun Nath | Loans
Are you planning to make a housing loan application? If yes, this article will help you understand the basic concepts related to the mortgage that you need to consider.
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For a housing loan, you must have sufficient income to get the loan approval. The monthly payment should be at most one-third of your income. Anything more than that makes your application process for a housing loan more difficult. Philippine banks generally do not approve loans that result in a monthly amortization of more than 30 percent of your monthly gross income.
If you wish to know how much you are going to pay every month, an amortization schedule is recommended. It helps to save your time and free yourself from the hassles of computing the amount which varies with each payment.
An amortization schedule is a table with the details of the amount of each payment allocated to the principal and interest. Early in the schedule, the majority of each periodic payment is the interest. After that, the majority of each periodic payment is put toward the principal.
You can use an online amortization calculator to find out your monthly payment. Just provide the information regarding your total loan amount, interest rate, and payment terms.
What is a down payment? It is the amount of money you pay upfront when purchasing a home. Your down payment influences the home price you can afford. Generally, the banks in the Philippines require at least 20% of the appraisal value of the property as a down payment. It is also a benchmark used to determine your maximum affordability.
A larger down payment reduces the total amount of loan. In other words, your monthly payment and the interest you need to pay is greatly reduced. Thus, it’s never too late to start saving and investing to accumulate the pesos you will need for a down payment on a housing loan.
When you are applying for a home loan, you can choose between fixed-rate and variable-rate terms. To make the best financial decision, it is important for you to know the difference between the two types of interest rates.
In a variable interest rate loan, the interest rate varies as market interest rates change. As the interest rate is charged on the outstanding balance, your monthly payments will also vary. On the other hand, the monthly payments of the fixed interest rate loan remain constant for the loan’s entire term. Its interest rate is independent of the market interest rates.
The fixed interest rate is generally higher than a variable interest rate. The initial interest rate on a variable-rate loan is more attractive than that of a fixed-rate loan with a similar term. However, as the variable interest rates are subjected to changes, thus comparing only the initial rates of both loans is not enough.
If the market interest rate falls after the fixed rate has been locked in, your monthly payments may be higher than the loans with a variable rate. However, things can also happen in the other way. Thus, the borrowers should consider how market interest rates tend to rise and fall in cycles instead of eyeing only the initial interest rates offered by the variable-rate loans. A fixed-rate loan will be a great choice for those who prefer consistent monthly payments, enjoy the predictability and have a personal budget to follow.
The total interest paid is directly proportional to the loan tenure. The higher the tenure, the higher the total interest paid, and vice-versa. However, when it comes to choosing your loan tenure, your affordability should be prioritized. A monthly amortization of more than 30 percent of your monthly gross income will be a really heavy financial burden.
You must read the documents carefully before you sign. Go through every single statement and have a full understanding. Don’t ever feel shy to ask anything about your home loan application. Moreover, check the documents to ensure that the terms are the same as what you negotiated and agreed upon. In addition, you must know the different charges such as the processing fees, late payment fees, and the likes.
Munmun has 12+ years of experience of working in several technology companies in India, UK, and Belgium. She holds a BE in Mechanical Engineering and a MS in Decisions Sciences from the London School of Economics. Follow Munmun on LinkedIn.