Thursday, December 25, 2014

Low Home Rates: Understanding the Risks

Interest rates as low as 5% -- or even less, in some cases -- have cropped up in real estate in recent years. The figures allow for an ideal season for buying or investing in property. Lower interest rates mean that the buyer or investor pays less in monthly amortization payments. 

For instance: a house costs P4 million. With a downpayment of 20% or P800,000, an interest rate of 12%, and a term of 10 years, monthly amortization for the property amounts to P45,910.70. But with a 5% interest rate, amortization is only at P33,940.96 -- a sum that saves the buyer or investor almost P12,000 per month.

However, these low housing rates also come with certain risks. Novice buyers might jump at the opportunity, whereas one ought to bear in mind that such rates are fixed only during the first year of this type of mortgage. In an adjustable-rate mortgage, or ARM, the interest rate changes after this initial period, and it is susceptible to market influences that dictate how much it is going to increase, which might spell disaster for an unprepared buyer or investor. A financial crisis, in particular, can turn the property into a negative asset, where you could lose money.

So how do you protect yourself and your asset? Look for banks and mortgage agencies, like Pag-IBIG, that offer protection by way of limiting the increase of your interest rate to 2%. 

Buyers and investors may also avail of a fixed interest rate instead. Under this setup, you may have to pay higher rates per month, but fixed-rate mortgages are immune to inflation and other market forces that may otherwise influence the ARM.

But ARMs aren't necessarily risky at all, especially with smart decisions and adequate preparations in place. Research and consult experts to gauge when, where, and how much you can afford or should pay for, to begin with. The real estate market is cyclical: make sure that you make your purchase during favorable market conditions.


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