What You Should Watch Out for When Applying for a Housing Loan
Published: August 11, 2013 | Updated: April 21, 2020 | Posted by: Moneymax | Loans
Before the house-hunting begins, it is good to know your affordability and eligibility for the housing loans in The Philippines. When it comes to housing loans, one of our main concerns is to find out which banks offer the most reasonable and affordable interest rates. However, there are many criteria that should be given the utmost consideration since the house-purchasing is one of the biggest decisions we make in our life. Don’t be lured by the low interest rate of a housing loan, there’s no such thing as a free lunch, and a good lunch is not going to be cheap!
Table of Contents
What Are Your Concerns When Applying For A Housing Loan
If you are ready to purchase a house, let’s see what you need to watch out to apply for a housing loan.
1. The Monthly Payment
When applying for a housing loan, you must not only have income but have a sufficient one to get the loan approval. The monthly payment should be at most one-third of your income and 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 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.
By providing the information regarding your total loan amount, interest rate and payment terms, you can use the online amortization calculator to find out your monthly payment.
2. The Down Payment
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, as 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.
Don’t be lured by the low-interest rate of a housing loan! Please read on to find out the types of interest rate available in the market.
3. The types of interest rate
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 fixed rate home loan and floating rate home loan.
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 to those who prefer consistent monthly payments, enjoy the predictability and have a personal budget to follow.
4. Loan Tenure
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.
What Else to Consider for a Housing Loan Application?
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.
Let’s read on to find out what you should avoid before applying for a housing loan! If you do not wish your application being delayed due to your own negligence, you must not miss out the next article!
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.