There are so many different loans available, therefore the more you know about the home loan process, the better chance you will have at finding a loan that will suit you.
Perhaps you are preparing to apply for your first home loan, or you may have had one for years and just need a refresher. There are so many different loans available, therefore the more you know about the home loan process, the better chance you will have at finding a loan that will suit you.
How can I purchase my first home? How much do I need to have saved? What benefits are there for first home buyers? Are home loans with the cheapest interest rates available to first home buyers?
Each of these questions is dealt with in greater detail in our FREE eBook: First Home Basics.
How Home Loans Work
Loans are very good when they are used in the right way. They enable you to be able to afford things that otherwise you would simply miss out on. A home is a good example. Few people would ever own a home if loans for their purchase were not available. The typical home is simply far too expensive, and as the prices continue to go up, they manage to stay well out of reach. But with home loans, you can have it right away and enjoy it while you are paying it off. In the meantime, with prices rising over time, your house gets more valuable while your amount owing is going down. That creates “equity” for you – the difference between the market value and what you owe.
So, since we like the idea of home loans we need to learn enough about it so that we know what’s going on. This will help us to be able to select one that suits our needs. It will also help us to implement a strategy to get rid of it! After all, a big part of the purpose of the loan is to enable us to fully own whatever it is that we have purchased without anything owing on it one day.
At the beginning, when you get the loan, the lender will provide some money for your purchase. This amount of money that they advance is the “principal” of the loan. Principal can be thought of as the primary or basic thing. And the primary thing that a home loan is all about is giving you the money that you need to purchase your home.
As time goes on and you make payments to reduce the amount you owe, the loan principal reduces until the loan is fully repaid and the principal is zero.
Where do you start?
Since typical home loans involve a lot of money, the lender needs to have some protections in place so that they are not left high and dry should things go pear shaped. To do that will require that a certain value of real property (as a home on a block of land) be used to secure the loan. That means that if you fail to repay the loan as required they have the legal ability to have that property sold to get their money back.
There is no limit to how many properties that you use to secure your loan, given that they are not also being used to secure another loan. The money from the loan might be used for the purchase of one or several of those properties. That makes no difference. There just needs to be enough total security value to cover the loan.
The way the property is provided as a security is through a mortgage. That’s a name for a home loan that is linked to a security property – as they typically are. That mortgage involves putting an “encumbrance” or “lien” on the title of the property. That’s simply a notation on the title (papers that define the property and show who the owners are) that says that along with the ownership of the property there is an obligation of repaying a lender.
As long as you owe money, you will have to pay interest. This is the basic cost paid to the lender for the use of their money. The interest rate is the means of calculating this interest. Usually it is expressed as an annual percentage, even though it is typically calculated daily and charged to the loan monthly.
Variable interest rates
The interest rate can be variable or fixed. With the variable rate the lender has the ability to change the rate as required by economic conditions. If the lender finds that it is more expensive for them to get the money that they are using to provide the home loans, they can increase the interest rate. If, however, the cost of their money goes down they can reduce the rate to both attract new customers as well as to retain their existing ones. It’s a very competitive industry, so the lender’s margins (the difference between what they pay for money and what they lend it out at) tend to stay very tight (a small difference).
Fixed interest rates
With some loans it is possible to fix the interest rate on all or part of the loan. The fixed rate that is on offer changes more often than the variable rate, but once it is set, it stays the same for the specified period of time, regardless of what the variable rate is doing. Doing this can either be seen as a gamble or it can be a matter of paying for insurance.
When the fixed rate period is over, the rate will revert to whatever the variable rate is at that time, and the payments will be adjusted accordingly. There are likely to be very strict limitations and associated penalties with regard to any sort of early repayment of a fixed interest rate loan portion.
Periodically you will be making payments on your home loan. This might be weekly, fortnightly or monthly. These payments will cover the cost of the interest, and anything additional will be used to reduce the amount of principal owing.
When you are ahead on your payments,which is to say that you have paid in more than just your required payments, the principal will be brought down below the level where it would need to be in order to be fully repaid on time. Most home loans will have the capability for the borrower to ask for that surplus money back. The amount of money that is available is called “redraw,” and the process of getting it is also “redraw” or “redrawing.”
Some loans will charge a fee for doing this, while with others it is free and also very easy to do. Redraw gives you the freedom to pay as much as you can into the loan knowing that if some sort of emergency or special need came up, it is still available.
More Information in the Home Loan Basics eBook
Each of the items given above are expanded upon plus a lot of additional related matters involving home loan basics are included in the free eBook currently on offer. Even if you know a lot about home loans it’s likely that you will learn something more by reading it, and you can use it like a reference book to look up matters that you need to know about. Download your free copy today. Click here to go to the download page.