The Ultimate Guide to Finding the Best Home Loan

Raising finance against an existing property or getting a mortgage to buy a home is a big commitment. The market can also be very competitive and confusing, with lots of types of loans on offer. Be sure to find a good mortgage broker to help you.

How it works

When applying for a loan, the bank or another lender will assess the value of the property, the equity in the property, and your repayment ability. They will then agree to advance you a sum of money that is repayable in monthly installments, at an agreed interest rate over a set number of years.

The loan will be secured against your property - so if you fail to make the repayments, the lender can seize and sell your property to recover their debt.

Types of loans

Most home loans will be for no more than 75% of the value of the property and usually for a term of 15 or 30 years.

‘Conforming loans’ are below a set annual amount and are usually cheaper than ‘non-conforming loans’, which are seen as higher risk. It may, therefore, be sensible to ask for an amount below this threshold in order to obtain lower interest rates.

As well as borrowing from a conventional lender such as a bank, Federal Housing Association (FHA) loans are also available, which are backed by the government. These may be useful for those who can’t get a conventional loan, but they are not always cheaper. There are also specialist loans such as Veteran’s VA Loans, but the lending limits for these are different in each state.

Interest rates

The interest rate is usually fixed and the shorter the repayment period, the higher the repayments will be. If you want to move to a different interest rate before the end of the term, you will have to find another lender to refinance the loan, but early payment charges and other costs will apply.

Adjustable rates are also available, but these can rise and fall unpredictably, so they can be harder to manage.

Bear in mind that if you can’t put down more than 20% deposit on the purchase price of a home, you will be legally required to take out private mortgage insurance. This will repay any sums owing to the lender if you default, but the insurance can be costly.