For most Filipinos, owning a home is a big part of their dreams. However, not many can afford to buy their own without financial help. While housing and lot ownership can be accessible in the country, there are still many factors that can hinder a Filipino family from owning a home.
Housing loan is available like PAG-IBIG but it is not the only option. If you’re thinking of buying a house soon but do not know how to get started, read on below all about the basics of loans and mortgage loans.
Home Loan vs Mortgage: What are their Differences?
The term “loan” can be used to describe any financial transaction where one party borrows from another in a lump sum with the agreement to pay it back in installments or staggered payments. A mortgage loan is used to finance a property. It is a type of loan but not all loans are mortgages, although all mortgages are loans.
With a mortgage, the borrower (you) is securing a loan with your lender using the property or house as collateral if you fail to repay the monthly dues. Home loans, on the other hand, can have other collaterals apart from the property itself, depending on the agreement between the borrower and the lender.
What is a mortgage?
Mortgages are often called “secure” loans. Unlike a personal loan, a secured loan promises collateral from the borrower to the lender. In the event that they stop making payments, their collateral will be collected and their former payments are forfeited. In the case of a mortgage loan, the collateral is the house itself.
Once the loaner stops paying their monthly repayments, the lender can take possession of the home in a process called foreclosure. A mortgage loan is also an agreement between you, the borrower, and the lender to move into the house without paying for everything in cash upfront. The terms of payment may be amended plus interest rate, which should be strictly followed lest you want to be prematurely but legally evicted from your house.
Who is allowed to get a mortgage?
A good percentage of homeowners are able to buy their own house thanks to mortgage loans. Not everyone can afford to be a property owner with the full cost coming out of their pockets. This means that a mortgage loan is directly related to a person’s buying capacity.
Ideally, anyone can own a home if they are qualified to avail loan or remortgaging fees. The qualifications or eligibility requirements usually include a person’s stable and reliable income and their debt-to-income ratio, which should be less than 50% for a safe bet.
Different Types of Mortgage Loans
Before knowing the advantages and disadvantages of home loan, first, you need to know that there are different types of mortgage loans. They cater to different needs, which means one might be more suited for you than the other. Each type of mortgage loan can also vary in terms of income tax benefits. Check them out below.
- Conventional loan
Conventional loans come in two packages, conforming and non-conforming loans. The former is a type of conventional loan that “conforms” to a set of standards by the Federal Housing Finance Agency (FHFA). The standards include a range of factors like your credit and debt but are mostly about the size of the loan, which is typically smaller in value. Non-conforming loans do not adhere to these standards and are usually reserved for larger properties or offered to borrowers with subpar credits and major financial problems.
Pros and cons of conventional loans
- Pros of conventional loans are that they can be used for primary, secondary, or investment property; the overall borrowing cost tends to be lower than other types of mortgages although the interests can be slightly higher.
- Cons of conventional loans are that they can require a higher downpayment; significant documents are required to verify your income, assets, and employment for the valuation fees.
- Jumbo loan
Jumbo loans are aptly named. These are loans that are more common in higher-cost areas. Due to the high amount of money the borrower needs, the lender takes a bigger risk. These transactions generally require more in-depth documentation for the borrower to qualify for the loan.
Pros and cons of jumbo loans
- Pros of jumbo loans include the borrower being able to borrow more money for a more expensive property; the interest rates are competitive compared to other loans.
- Cons of jumbo loans include a bigger downpayment, usually at around 10 to 20 percent; the debt-to-income ratio should not be above 45 percent; the buying capacity of the borrower must be a significant amount whether in cash or savings.
- Government-insured loan
Governments are not typically mortgage lenders but they can play a role in helping their citizens acquire home loans by backing government agencies or issuing tax benefits to homeowners. There are many types of government loans that often gauge an individual’s capacity for one of their biggest financial decision while providing low-interest rates.
Pros and cons of government-insured loans
- Pros of government-insured loans are that they help borrowers get the loan amount they would not otherwise qualify for in a conventional loan; the credit requirements are more relaxed; borrowers don’t need to make a large downpayment.
- Cons of government-insured loans are that borrowers must live in the property so it cannot be a second or investment property; the loan limits are lower but the overall borrowing cost could be higher.
- Fixed-rate mortgage
Just as the name suggests, fixed-rate mortgages are loans with the same interest throughout the life of the loan. This means that the monthly payments are the same amount with the same interest rate. This type of mortgage usually comes in terms of 15 to 30 years, but some lenders allow for any term between eight to 30 years.
Pros and cons of fixed-rate mortgages
- Pros of fixed-rate mortgages include the monthly principal amount, interest payments, and other fees staying the same until you finish the loan; more precise budget for monthly expenses.
- Cons of fixed-rate mortgages include paying for a longer-term loan and higher interest rates.
- Adjustable-rate mortgage
Unlike the stability of fixed-rate mortgages, adjustable-rate mortgages (ARMs) can have fluctuating interest rates. The rate can go up or down depending on market conditions. An ARM property can have a fixed rate for the first couple of years before changing to a variable interest rate for the rest of the loan’s life.
Pros and cons of ARMs
- Pros of ARMs are that they generally have a lower fixed rate in the introductory period; you can save a good amount of money if you budget it well.
- Cons of ARMs are that they could become unaffordable with more interest in the future depending on the market value; the risk of home values falling, making it difficult to sell the property.
Advantages and disadvantages of mortgage
There are many advantages and disadvantages to getting a mortgage. The most obvious advantage is being able to afford your dream home, something you can call your own in the long run. Whether it is yours or a shared ownership type of property, after you have finished your loan, that place is yours to do with as you please. As the borrower, your steady repayment also builds up your credit and income tax benefits.
When you talk about advantages and disadvantages, the disadvantages can sometimes put off people from completely trying something. In mortgages, the biggest disadvantage is the fact that you will be liable to make your repayment to your lender in big sums of money, depending on your agreement. This is why home mortgages are not for everyone because they can be pricey, especially compared to simply paying rent.
What is a Home Loan?
Home or housing loan is generally described as an amount of money borrowed by an individual from another who lends money, which is usually banks and companies. The borrower (you) has to pay back the loan amount with interest in Easy Monthly Installments (EMIs) over a period of time that can vary depending on your agreement with the lender (bank or company).
There are different kinds of home loan options that allow you to buy not just houses but properties with a significantly lower interest rate, whether it is for personal or commercial use.
- Home Purchase Loan is buying any house that is within your budget.
- Construction Home Loan is using the loan to cover the costs of building a house.
- Land Purchase Loan is using the loan to buy a piece of land.
- Home Improvement Loan is using the loan to renovate the house.
- Home Repair Loan is repairing and restoring the house using the loan.
- Home Extension Loan is increasing the space of the house or property using the loan.
Factors To Consider When Applying For A Home Loan
If you’re considering applying for a home loan, there are some factors you need to consider first.
This is the base amount of money you are going to borrow from the bank or financial institution. No matter the type of loan you are getting, the principal amount is the agreed-upon total sum of your debt to your lender, without the interest.
This is how long you will be paying off the loan. Depending on the nature of your loan and your expected income, you should choose a period that is comfortable for you. Be careful when doing this as a foreclosure happens more often than not because of unsustained loans with high monthly repayment.
The interest is the amount the bank or financial institution charges for its money lending services. Its rate is determined through the amount of the principal and how long you will be paying off the loan.
The EMI or Easy Monthly Installments is the amount of your monthly due for the housing loan until the end of the loan period. The EMI is a combination of the principal amount plus the interest rate. With each repayment, your loan will gradually increase until you have paid them all off.
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