Thursday, February 27, 2014
Owning a home is a big step toward financial indepence. However, most people don’t have the financial capacity or enough savings to buy a home outright.
A practical solution to limited finances, a housing loan enables home buyers to borrow money and pay for their home in staggered installments. The property is then used as security in case the property buyer defaults on the loan.
The principal refers to the total amount owed by the borrower. Paying your monthly installments will reduce your principal amount.
Your monthly installment is subject to an interest rate, which refers to the rate charged for the use of money. In the Philippines, interest rates are calculated on an annual basis, even if your repayment schedule is not on a yearly basis. Interest rates are usually fixed for a set period of time and then subject to re-pricing thereafter.
The loan term refers to the total period wherein the borrower must repay the housing loan. Typically, banks allow home buyers to borrow up to 80 percent of the property value, and the loan term may go as long as twenty years with a minimum loan amount of Php 500 000.
Basically, when you pay your monthly installments, the amount in excess of the interest rate goes to reducing your principal balance and essentially, your total debt. Over the agreed loan term with the bank, you will have to pay monthly installments, which already include both the debt repayment and interest.
Loan terms and interest rates vary depending on which bank you apply with and what type of loan you acquire. It is best to consult the bank you plan to apply a home loan with. Most banks provide loan application information and feature sample loan computations on their website. Take advantage of these services and check out different banks online too.