Philippines

Home Loan Terms That You Should Know

If you have decided which of the home loans above to avail, there are some key terms you need to know to understand how things work.

  • Principal – the total amount you want to borrow on any home loan mentioned above. If you make monthly payments based on a fixed rate loan at a bank, you can reduce the principal amount.
  • Downpayment – the upfront payment that a buyer (you) pays to buy a home. Typical downpayment is around 20 to 30 percent.
  • Loan tenure – the length of time, which could be months or years, to pay the home loan. If the approved mortgage has a tenure of 15 years, it means it will take you 15 years to fully pay your home. Generally, home loans are available up to 20 years. The longer the tenure, the higher you pay interest rates.
  • Interest rate – the rate charged by the lender for your loan, which is displayed on a yearly basis. It’s also known as the APR or annual percentage rate. For example, a home loan in BDO of 10 years tenure has 5.5 percent interest rate.
  • Refinancing – you pay-off your existing loan in full and avail a new loan that has lower interest rates.
  • Fixed rate – for fixed rate loans, the rate remains constant during the entire tenure of the loan. Banks offer fixed-rate loans where you are locked-in for low rates and you are spared from the fluctuating rates depending on the years agreed. You can have a fixed rate of 3 to 5 years, but it also varies depending on the banks’ discretion and assessment of the home loan application.
  • Pre-payment – you pay off your loan, whether partially or fully before the tenure ends. Partial payments can lower your monthly amortisation but some banks have fees or penalty for pre-payments, so better read the contract first.
  • Foreclosure – when you are inconsistent in paying your loan, the bank can repossess your property and this will happen. The bank then will try to sell your home so you can settle the outstanding balance of your loan.
  • Collateral – an asset which you can pledge to the lender as a security for your home loan. The banks, for example, can ask for collateral of your land title if you’re borrowing money for home improvement. In case of a foreclosure, the bank has the right to sell the land and claim a legal right.

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