Home Loans – What you should know?

 home loans what you should know

Photo Courtesy: snarkfinance.com

There are many home loan comparison websites catering the needs of borrowers. But these information providers more or less corrupt the outlook of these borrowers. In the eyes of an un informed borrower, all loans may look the same and the one with the least interest rates the most attractive one. But that is not a true representation of the home loan story. Mortgages come with all sorts of bells and whistles.

Here are some of the factors you should consider before deciding the most suitable loan for you.

 Fixed Interest and variable interest loans

For a fixed interest rate loan, interest rate doesn’t fluctuate during the fixed period of the loan. The borrower will be able to predict their future payments accurately. Variable rate home loans are anchored to the prevailing discount rates. Usually fixed home rates are slightly more than the variable home loan rates  to hedge against the risk of interest rates rising. But it will save the day, if the Reserve Bank raises home loan rates exponentially in a short period of time.  A fixed interest rate loan will lock in interest rates for one, two, three or five year terms.

Redraw line of credit and offset facilities for Home Loans

Redraw facility allows borrowers who pays extra funds into their home loan to draw down the extra when they need the cash. The interest rate for the funds re drawn from a mortgage is same as the mortgage rate.  A redraw facility allows the borrowers to put extra cash into their mortgage. This effectively reduces the interest rate charged on the account.

An Offset account enables you to have every cent of your money working to reduce your mortgage rather than sitting idly in your cheque or savings account. An offset account can be beneficial for those find it difficult to save money. If your wages go into your offset account, it will reduce your interest payments as long as it is in the offset account, even though you will be spending some or most of the money over the course of the month. Offset accounts are more flexible, and many provide ATM access that let you withdraw money at any time without additional charge.

A line of credit is an approved limit of borrowings that you can use a piece-at-a-time or all at once.  It is handy for people who want to invest in invest in property, renovations or short term cash shortages.  It is a method of offering extra funds being secured by your property and mortgage.

Interest only loans and principal and interest loans

Borrowers go for interest only home loans to maximise their cash flow or to maximise their tax deductions and achieve higher leverage. It also helps borrowers to reduce their monthly repayments. It is best suitable for investors when house prices are going up.

Interest only loans involve repaying only the interest accrued for the month.  A principal and interest loan requires a payment to cover the interest and enough principal to finalise the loan over the period it has taken.