The most popular method of financing a home purchase is with
a mortgage. This is a loan that is secured over the home. There
are a number of different mortgage suppliers and you will have
to shop around in order to get the best deal. Given that your
home is probably the single biggest purchase you will make
in your lifetime, you must make sure to take the care and attention
that the transaction merits. Mortgage rates can vary greatly
from lender to lender and the amount your rate is set at can
make a huge difference to the amount your repayments will amount
to. Even a small difference in rates could save you thousands
of dollars or allow you to have your home paid off years sooner.
It is
the interest rate on the home equity loan. Interest rates for
loans differ, so it pays to check with several lenders for the
lowest rate. Compare
the annual percentage rate (APR), which indicates the cost of
credit on a yearly basis. Be aware that the advertised APR for
home equity
credit lines is based on interest alone. For a true comparison
of credit costs, compare other charges, such as points and closing
costs, which will add to the cost of your home equity loan. This
is especially important if you are comparing a home equity credit
line with a traditional installment (or second) mortgage, where
the APR includes the total credit costs for the loan.
In addition,
ask about the type of interest rates available for the home equity
plan. Most home equity credit lines have variable interest rates.
These variable rates may offer lower monthly payments at first,
but during the rest of the repayment period the payments may
change and may be higher. Fixed interest rates, if available,
may be slightly higher initially than variable rates, but fixed
rates offer stable monthly payments over the life of the credit
line.
Fixed or Variable
When looking for the best loan, there are certain terms
you will need to be familiar with. For example, mortgages
generally come as either a fixed rate mortgage or a variable
rate mortgage. The fixed rate loan will keep the same interest
rate and monthly repayment for the whole lifetime or term
of the loan. This will generally be for a period of 10, 15,
20 or 30 years. If the rate is fixed for a period, such as
the first 2 or perhaps 5 years, and then reverts to a variable
rate it is known as an adjustable rate mortgage or ARM.
When the ARM rate becomes adjustable, it will move up or
down periodically according to a specified market index.
These can include the Prime Rate, the LIBOR or the Treasury
Index among others.
With the adjustable rate, some of the risk of changing interest
rates that would otherwise fall on the bank is transferred
to the borrower. They are therefore cheaper averaging somewhere
between 0.5% to 0.2% lower than a 30-year fixed rate mortgage.
If the rate is particularly volatile or difficult to predict
than a fixed rate mortgage may not even be possible.
In the majority of cases, the savings of an ARM outweigh
the risks of a rising interest rate. Especially where the
mortgage is for ten years or less.
Fees
Lenders may charge various fees when giving a home loan
or mortgage. These include entry fees; exit fees, administration
fees and lenders mortgage insurance. There are also settlement
fees (closing costs) the settlement company will charge.
In addition, if a third party handles the loan, it may charge
other fees as well.
Banks usually charge a valuation fee, which pays for a surveyor
to visit the property and ensure it is worth enough to cover
the mortgage amount. This is not a full survey so it may
not identify all the defects that a house buyer needs to
know about. Also, it does not usually form a contract between
the surveyor and the buyer, so the buyer has no right to
sue if the survey fails to detect a major problem. For an
extra fee, the surveyor can usually carry out a building
survey or a (cheaper) "homebuyers survey" at the
same time.
