4 Things to know when Getting a House Mortgage

A home loan is a suitable option if you need a large sum of money. To manage finances intelligently and avoid falling into a debt spiral, you should pay attention to a safe loan threshold, interest costs to pay, loan term,..

Table of Contents

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1- Safe borrowing threshold
2- Loan agreement terms
3- Interest expenses need to be paid
4- Loan period

Finance is one of the important factors that you needs to consider before making any decision about the future home. You should only consider buying a house when you have at least 30 - 50% of the house’s value without using retirement and emergency funds. Again, don't use your retirement and emergency funds to buy a house because you may find yourself in a difficult financial situation.

1- Safe borrowing threshold

According to experts, you need to have an money amount on hand equivalent to 30% of the house value. A safe bank loan threshold is usually no more than 50% of the value of the house you want to buy. The best loan threshold is less than 30%. The threshold for dangerous borrowing is over 70%. Ideally, you should only choose to buy a house with an appropriate price that suitable with your financial ability, you should not be ambitious to buy houses that are too expensive with your current financial ability.

2- Loan agreement terms

Before signing a home loan contract, you should read the terms of the contract. Particularly, you need to pay attention to the specific penalty fee on the contract. If the loan is overdue, the bank will apply an additional interest rate based on the interest rate of the term. If the loan is paid early, the bank might be also apply a penalty fee on the outstanding credit.

3- Interest expenses need to be paid

Banks might apply two methods of calculating interest which are calculated on the reducing outstanding credit and the initial outstanding credit.

4 Things to know when Getting a House Mortgage What to know when Getting a House Mortgage? / ph: pexels

Specifically, calculating interest on the initial outstanding credit ie the interest will be calculated based on the original borrowing money amount throughout the loan period. Calculating interest on a reducing outstanding credit means that interest each month will be calculated based on the actual amount owed after deducting the principal paid in previous months.

Moreover, most people are only interested in the preferential interest rate in the first period. However in reality, you are only entitled to that preferential interest rate for a certain period which can be 6 months, 1 year or 2 years. At the end of this term, the interest rate will be floating, changing depending on the band and regulations of each bank. Rising interest rates will increase debt repayment pressure. You may fall into a situation which you can't keep up when the loan interest rate suddenly rises too high.

4- Loan period

Normally, banks will offer a maximum loan period of 20-25 years. For financial security, you should take a long-term loan because you will be able to repay the bank debt and have money to cover expenses and living expenses. You can pay off your loan early only if your financial situation is really suitable.

If you have a short-term loan, you need to ensure your financial ability. Otherwise, you will face great debt payment pressure. Specially in case of late repayment, the bank will judge it as a bad debt which will affect your personal credit rating and ability to borrow money in the future.