Home Loans 101: A guide for beginners

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THERE are many loan options available to you, whether you intend to buy your first home, get a second mortgage or reverse mortgage, or refinance. But all these entail an understanding of how mortgages work. There are many moving parts to a mortgage, which can be daunting for those who’ve never dealt with it.

You might have questions about how it works. Does a mortgage come in different forms? Can you get one with fixed rate home loan rates? Hold your questions and read this beginner’s guide so you can get basic information about home loans, which will allow you to be ready when you finally decide to purchase a home.

What Is A Mortgage Or A Home Loan? 

Mortgages are loans that are used to buy a home. The lender gives you the amount of money you need to acquire a home, and to repay the loan, you consent to monthly installments over a predetermined period, usually running from about 15 to 30 years.

How Do Home Loans Work? 

Once you’ve chosen your dream home and a lender you’re comfortable working with, your mortgage becomes part of your monthly expenses within the duration of the loan. Making a sizeable down payment on your loan can help you pay it off faster. Down payments range from 3 per cent to 25 per cent of a home’s total price and are usually paid upfront. Although the final percentage depends substantially on which type of mortgage you’re applying for, a more significant down payment means a smaller mortgage loan and less time spent repaying the loan.

Whatever your upfront payment will be, the monthly payment for your loan will remain roughly the same. Over time, the amount of each payment goes towards interest, and the amount going towards principal will change—this is known as amortization. In the beginning, you’re most likely paying the interest fees, but as time goes by, the percentage shifts to cover more of the principal payment.

You might also need to consider other additional costs you’ll have to pay each month, like property taxes and homeowners insurance. But these would vary from year to year. Some lenders offer the convenience of escrow accounts for this purpose. Escrow is a legal procedure that allows a third party to hold your money temporarily until the sale is finalised.

The lender might set up an escrow account, which allows them to manage regular housing costs such as taxes and insurance while representing the borrower after the sale has been concluded. Although every mortgage doesn’t need an escrow account, those with down payments below 20 per cent must have one.

Additionally, since mortgages are secured loans, collateral is required. If you suddenly stop paying the mortgage, your lender may reclaim your house since it’s been considered the collateral of your mortgage. In this situation, foreclosure occurs.

Applying For A Home Loan 

An easy mortgage application process is possible, although it can still be time-consuming. To begin, you need to research lenders to find out which of them offers the best mortgage rates. Your mortgage interest rate dictates how much the loan will cost you in the long run. Your credit score will establish whether or not you’re eligible for the most competitive rates that a particular lender is offering.

Types Of Home Loans 

The home loan products in the highly competitive lending market of Australia can be confusing. This is because there are many types available. As a borrower, you must understand your different finance options’ terms, conditions, and features before committing to a specific mortgage.

For your convenience, here are the four most common types of home loans in Australia these days:

  • Fixed vs. Variable home loan: Fixed rate and variable or adjustable-rate mortgages are two of the most common home loan types in Australia. Fixed-rate mortgages have the same interest rate throughout the term of the loan. On the flip side, a variable-rate mortgage has a diverging interest rate over time, so you could initially pay very little interest but then see it grow later on. Rates on adjustable-rate mortgages can drop down eventually, too.

If you want to know precisely what you’ll pay throughout the loan’s term, you’re better off with a fixed-rate mortgage. Unlike the tighter lending procedures for investment properties, home loans could be looser, especially since they take into account an individual’s credit history.

Interest-only home loan: This type of mortgage allows borrowers to make repayments that only cover the interest and fee of the loan, which is usually a maximum of five years. This means that there won’t be any principal reduction for a defined period.

Note, however, that the mortgage reverts to the standard arrangement once the interest-only period ends.

  • Split Rate home loan: If you want to enjoy the benefits of both fixed and variable mortgages, this type of mortgage is for you. It allows borrowers to place one portion of their loan under a fixed-rate arrangement and set the other under a variable rate. That way, they can capitalise on possible rate drops while having the peace of mind that a fixed-rate provides.

Conclusion 

If you’ve never applied for a home loan before, the process may seem exhausting. This is understandable since homeownership is a huge step for anyone. This guide will enable you to prepare to apply for a mortgage and increase your chances of snagging a favourable interest rate. Any home loan you’re considering should be looked into properly, and a lot of time has to be given to the entire process. Remember that a bit of patience goes a long way.