Loan Spot

So you’ve decided to buy a home and are looking for a suitable home loan. Where do you start? How do you find the right loan for you?

Well, the first thing to keep in mind is that shopping for a loan is not something you should rush. Ideally, you should sit down with your mortgage planner to fully discuss your current circumstances and needs, as well as your long-term objectives. This will help the mortgage planner identify the key criteria that a loan should meet.

While I thoroughly recommend consulting a mortgage planner, here are a few tips when it comes to finding the right loan.

First of all, be aware of some of the different types of loan available to you. For instance, one key distinction is between fixed rate mortgage and variable or adjustable rate mortgages (also known as ARMs).

When there is uncertainty about interest rates or a good chance of interest rates increasing then a fixed rate mortgage is often the best and most affordable option for home buyers. Because the interest rate is fixed for the life of the mortgage, you will simply make the same mortgage payment every month. In this case, when you purchase your home you will know if you can afford the monthly payments or not. The only downsides are that there may be other fees and penalties applying to such a loan and you won’t benefit from lower payments if interest rates decline.

A variable rate, adjustable rate or fluctuating loan is where your interest rate and subsequently your mortgage repayments change depending on the nationwide home interest rates (usually those based on U.S. Treasury securities). Variable rate loans are often attractive when interest rates are low, but can cause people difficulty when they aren’t prepared to meet the higher payments associated with higher interest rates.

There are also ‘hybrid’ loans where the interest rate is fixed for a certain period, and then becomes floating. A lot of people have blamed these kinds of loans for the substantial increase in mortgage stress experienced by people in recent times. This is because many borrowers who took out such loans had low fixed rates to begin with and weren’t prepared for a substantial increase in their rates when they became floating rates.

Another distinction is between ‘interest only’ loans and ‘interest plus principal’ loans. An interest only loan is where your mortgage payments comprise entirely of interest, and you are expected to repay the principal of the loan at the end of a pre-determined term. Such loans can appeal because the monthly payments are lower than otherwise. However, such loans don’t allow you to gradually increase your equity in the property, and you must still be prepared to repay the principal of the loan when required. Nevertheless, interest only loans are often suitable for you if you are an investor in a fast growing market where your monetization strategy is to sell the property for a profit.

Another factor to consider are the various penalties that may apply under the terms of a given loan. In particular, some loans have hefty penalties for paying off the mortgage early. These penalties can cost thousands of dollars. In addition, under some loan agreements you will also be penalized if you repay more than a certain percentage during a year of the loan term.

These are just some factors to keep in mind when looking for a loan. There are also others. Ultimately, you are best off consulting a mortgage planner who can help you sort through the complexities of getting and paying off a loan, and assist you find the loan that meets your wants and need.