Tips for First Time Loan Borrower

Thinking of availing a home loan or mortgage for the very first time?

First time home loan shoppers are highly likely to fall for the sugar words and marketing tactics of banks or home loan providers. The following tips may help you strike the best deal without having to sulk over potential mistakes usually committed by inexperienced borrowers.

For your First Time Home Loan…

(Please note that these are just a few guidelines and there may be a lot more that you might want to check out with respect your specific scenario in your country or state)

1. Shop around for the best deal

You may want to compare the loan offers – in terms of rates, monthly installment as well as overall mortgage package – from at least four to five different financial institutions before arriving at a final decision. In addition, you may want to discuss with your friends or relatives who might have had experience with each of these banks. Please note that the lowest interest rates do not mean the best deal. You have to know exactly how they calculate the interest (daily reducing balance, monthly reducing, quarterly reducing etc) and if there are additional charges. In addition, understand if there are any processing fee or lawyer fees along with the rules for prepayment or foreclosure.

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2. Negotiate for a discount rate

It might sound odd but most of the banks have the flexibility of offering 0.5% or 0.75% (might vary in certain countries) less interest than the standard advertised rate. This is particularly true if you are having a stable and high earning profession (e.g. doctors, lawyers,…). In addition to these so-called ‘professional packages’ there are also corporate discounts available from some banks targeting specifically people from certain high profile corporates. Hence don’t be ashamed to negotiate.

3. Plan the rest of your life ahead

Never take a home mortgage assuming certain raise in salary or additional income that ‘might’ come in the future. Instead, plan from the point of view of additional financial burdens that you might encounter in the coming years (or the tenure of the loan). This may include wedding expenses, child education, purchase of vehicles or even expensive vacations.

4. Insurance, riders and deposits

It is highly advisable that you take home mortgage insurance for 25% to 30% of your home loan value to avert any risk of non-payment due to critical illness, accidents, job loss due to the above or even death. Mortgage insurance is mandatory (from the lender’s point of view) in most countries if the home purchase contribution from your side is less than 20% or so. If you do not wish to take mortgage insurance, set aside 10% to 15% (or even 20%) of your loan amount towards a term deposit or low risk bank investment. This will indeed help to repay your loan in the case of temporary no-income situations. This will also help in reducing your monthly outflow towards loan.

(You can have both the deposit as well as mortgage insurance which can help you with a little bit of tax planning as well)

5. Go for it ONLY when you are ready!

A home loan is a lifelong burden for most people. Hence before taking a loan, do a readiness and feasibility check from your end to see if it’s the right time to go for such a financial commitment. Also chew only as much as you can swallow – a huge home may be your dream but you have to really think whether you can afford it.

The other aspect of readiness check is to have a good credit history and stable background. Building your credit history by paying back your credit card bills on time, not withholding tax dues, not having several loans etc will boost your credit record. In addition, you may jump jobs and rented homes as little as possible to establish a good history. Frequent address changes are not considered good by financial institution in certain countries.

I hope these tips for first time home buyers were interesting to you. You may want to share this page with your friend who is in the lookout of a home loan.

What is A Home Equity Loan?

Home Equity Loan Explanation: A home equity loan is an additional (secondary) loan taken against the value of your home. In other words, home equity loans are secured consumer loans for which the collateral would be the borrowers’ equity in their homes.

Now, what is home equity? Home equity is nothing but the difference between a property’s cost and its value.

The money raised via home equity loans can be used for any purpose related or unrelated to your home or property. You could use this money for your children’s education, for further furnishing or extension of your home or even to pay off your high interest debts or credit card dues. The home equity loan interest rates are usually lower than car loan rates and hence it may make sense to use your home as collateral to buy a vehicle.

The interest on home equity loans is tax deductible.

In order to apply for a home equity loan, one should have a decent credit history. There may be finance institutions that provide home equity loans for people with bad credit. However, you may take extra care while signing up with such deals and especially be aware of hidden charges etc.

Home equity loans have their pros and cons as in the case of any other loan types. The advantages include low interest rates, fast approval and possibility to use the loan amount for any purpose as mentioned above. The main disadvantage of home equity loan is that your home needs to be appraised for its home equity that can be secured against your loan. Also, home equity loans are available only if the owner is occupying the home under consideration.

Just like the case of selling a car with a lien, selling a home with a home equity loan on it usually requires you to pay a penalty remove the loan.

Taking an additional loan by using your existing home as the collateral is an exercise that has to be done after analyzing the above pros and cons. If used judiciously it can really work to manage your finance needs.

How much Car can I afford based on Salary?

A lot of financial advisers and loan agents may say that you can afford to spend up to 33 or even 35 percent of your net income towards paying off loans – all types of loans included, that is.

However, that kind of financial planning by Americans is what exactly led us to the credit crisis that we are facing today. Spending more than what one can afford doesn’t help your life at all.

How much car can I afford?

If you are talking about less-risky route, 25% is an ideal figure (in terms of your net income) that you can afford to spend, on all your loans or mortgage together, to be on the safer side.

For example, assume that you have a monthly take home or net salary of $4000.
Your total monthly mortgage outflow in this case would be $1000 or 25 percent of 4000.

This should include your home mortgage, car loan, car insurance premium etc. In this case, how much of it can be on car loan alone?

In the above example, something like $250 or $300 per month is what you can afford to spend on car and related expenses such as car insurance. Obviously, then you need to do your home loan math as well based on the remaining amount which may not be too bad a figure if your spouse is working.

Another guidance

Another question here is how much of your net income you want to spend on monthly transportation (i.e. car loan, car insurance, maintenance and gas)

The answer is ideally 10% of your net income or $400 in the above example. Now you may split that into car loan premium, insurance and gas expenses.

Sounds scary? Aren’t we all spending a little too much on our cars?

Please note that the above figures are for working individuals and the same calculation may not apply to students etc