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It’s a pretty common milestone to buy a new home and for first-time home buyers, there’s no other way to get their property other than to get a mortgage. If you are unfamiliar with home loans and interests rates, here’s a crash course for beginners.

Much like with any loans, you monthly payment is always comprised of a part of the principal amount of money that you have borrowed plus the interest that is calculated using the interest rate on top of total principal amount. Financial institutions like banks use a formula to determine how your total loan amount is calculated.

In addition to the interest rate and total principal amount of loan you borrowed, there’s also the time frame or period of the loan. The longer the period, the less your monthly payments are.

What are the Different Types of Interest Rates?

There are two types of rates: the fixed and the variable rate. Here’s how they differ.

  1. Fixed interest rates

When your mortgage comes with a fixed-interest rate which is also known as a fixed-rate mortgage, your monthly payment do not change throughout the entire loan term. Since your interest will not change overtime, just by adding the monthly payment of the principal plus the fixed interest cost, you can already know what the monthly payment amount is for the rest of the term.

  1. Variable interest rates

The next type of mortgage that comes with a variable interest is called a adjustable-rate mortgage. Since the interest rate is not fixed, your monthly interest can still go up or low throughout the entire loan term due to either inflation or deflation. When the interest rates go up, your monthly loan payment also go up. Typically, interest rates remain similar for around 5 years before they fluctuate afterwards.

When taking out a home loan, lenders will always pay attention to your credit score. It is, after all, what they will base their approval on and how much interest they will charge. This is why it can be a challenge to get approved for a mortgage when your credit is bad. If you do qualify for one, it is also expected that they will charge you a very hefty interest.

Work on Your Credit Score

If you have obtained a copy of your credit report and to clearly shows there that there have been patches especially where your payment history is involved, the best thing you can do is work on improving it. Follow the credit rules that can help raise your score. Among these include paying off some of your existing debts and making sure your bills and other payments are done on time. 

Make a Huge Down Payment

 When you pay a higher down payment for a mortgage, you will need to take out a much smaller loan. Lenders will also appreciate it more when a borrower is willing to put more money in. This is why, if you can, try to save up or borrow money from friends or family to raise a good sum.  

Pay off Some of Your Debts

It helps when you bring your credit utilisation down to ideal numbers. Generally, you would want your credit utilisation to not go beyond 30%. So, if you have existing debts now, paying off some of them can help improve your chances of getting a nod for a mortgage. 

Refrain from Applying for New Credits

Avoid applying for any more credit while you’re working on getting approved for a mortgage. Remember that every time you apply for a loan, hard credit checks will be performed, which can bring your credit score down. The same is true for opening new credit cards or new accounts. Avoid them while you’re working on a mortgage approval. 

Yes. But whether or not you should is another thing entirely. In most cases, paying loans off early can be considered a good thing, but this can be something of a grey area for home equity loans. While some lenders would love nothing more than to have you pay for your loans earlier than expected, there will be some others who will charge prepayment penalties.

Prepayment penalties are a caveat that some home equity loans include in their agreement terms. Basically, borrowers are expected to pay a penalty fee if ever they decide to repay what they owe earlier than the preset term. This is due to the fact that some home equity lenders don’t actually get any accrued income from interest if the loans are paid early. This is an additional cost that you have no choice but to shoulder. If you’re met with a lending firm that charges a prepayment penalty, it is better to just opt for the regular route of repayment instead. Not only will this save you the unnecessary expense of the penalty fee, but it will also allow you to space out your outgoing expenses.

Since most loan terms are designed to accrue interest, you will still be paying more than what you initially borrowed. It will be a significantly lower sum than if you had to shoulder a prepayment penalty, though. If you’re considering a home equity loan and want to borrow money with the intention of repaying it immediately, choose companies that don’t have a prepayment penalty set into their terms.

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What actually make our lending company very much preferred is because with have the best and most flexible repayment plan. We provide our clients the freedom to choose and get the best repayment plan that will suit their needs and financial status. We make sure that our clients will be able to pay on time without any hassle at all.