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Mortgage 101: A Beginner’s Guide to Understanding Home Loans
By Deltos Finance on September 5, 2023
Purchasing a home is undoubtedly exciting. But the path towards it — starting with understanding home loans — may seem daunting. That’s especially true for first-time buyers. But fear not because we’re here to guide you with expert knowledge and local insights. Read on to learn home loan basics; we’ll quickly explore the intricate world of mortgage types, interest rates, eligibility criteria and the application process.
Whether you seek home loans in Hobart or the wisdom of a mortgage broker, you can rely on Deltos Finance as your trusted companion. Read on to learn more.
Exploring Home Loan Terms
Before signing the dotted line of any home loan agreement, familiarise yourself with basic industry terms.
- The principal refers to the amount you borrowed from the lender. As you make principal and interest repayments, the principal amount reduces.
- Interest represents the cost of borrowing money expressed as a percentage of the principal. The interest rate may be fixed or variable, with the interest expense calculated as a percentage of the loan balance at a given point in time.
- Repayments consist of both principal and interest (except in the case of interest only loans, where only the interest expense is paid for an agreed period of time), gradually building equity in the property until the principal amount is paid back in full.
Understanding Home Loan Basics
Also known as mortgages, home loans are essentially financial agreements between borrowers and lenders that enable individuals to purchase or refinance a property. These loans typically span over extended periods, with terms generally ranging between 15 to 30 years. As borrowers make monthly repayments, the principal balance is paid down, building equity in the property, eventually owning the home outright when all the repayments are complete.
Demystifying Mortgage Types
Unsure which mortgage product you should apply for? Let’s quickly explore the common mortgage types that cater to diverse financial needs and preferences.
- Fixed-rate mortgages offer stability with a constant interest rate throughout the fixed term (generally between one to five years), facilitating easy monthly budgeting. The upside with fixed interest rates is that your repayments remain the same, even when market interest rates are increasing. On the flip side, with a fixed rate, repayments do not reduce as market rates reduce.
- On the other hand, variable-rate mortgages fluctuate with market conditions, influencing monthly repayments. The Reserve Bank of Australia (RBA) determines the target cash rate based on economic conditions, and lenders adjust their interest rates accordingly.
Understanding Interest Rates
Comparing loan options? Fixed vs variable-rate mortgages? Apart from looking at the loan term and possible fluctuation of interest rates, you have to consider the rate itself.
Interest rates significantly impact the overall cost of a mortgage. Lower interest rates can mean reduced monthly payments and overall loan savings helping with an early retirement. But remember that lenders assess borrowers’ creditworthiness and market conditions to set interest rates.
Evaluating Loan Eligibility Criteria
How do you know you’re eligible for a mortgage product? Lenders consider various factors to determine borrowers’ eligibility for a home loan. These criteria may include credit scores, income and employment history, and the debt-to-income ratio. Higher credit scores enhance eligibility and may lead to better or lower interest rates. Also, having a steady income and stable employment may strengthen your loan eligibility.
Navigating the Mortgage Application Process
Like any financial agreement, the mortgage application process involves several essential steps. It starts with obtaining pre-approval, which streamlines the house-hunting process by determining the loan amount you qualify for. So be sure to gather necessary financial documents like pay slips, tax returns and bank statements. You may have to submit them during home loan pre-approval or when asked for supporting documents for final approval.Â
Lenders also conduct property appraisals to assess market value, followed by underwriting to evaluate creditworthiness before finalising your home loan terms.
In regard to the application paperwork, a good mortgage broker takes care of this side of the application process, keeping you in the loop every step of the way.
Leveraging the Expertise of Mortgage Brokers
Undeniably, navigating the complex world of mortgages is overwhelming, especially for first-home buyers. Fortunately, you can rely on experts to guide you. Engaging the services of a trusted mortgage broker, like Deltos Finance in Hobart, empowers buyers with professional guidance and access to diverse loan options. Mortgage brokers will help analyse your financial situation, compare products from multiple lenders and help you secure the most suitable and competitive mortgage to align with your needs.
Turn to Deltos Finance to kickstart your home-buying journey. Our Hobart mortgage brokers are ready to empower you with multiple mortgage options and personalised solutions to achieve your dream home. Contact us today for more information and guidance.Â
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