Low interest mortgage
now and then, you see advertisements in the newspapers and the television about the lowest interest rates charged by the bankers and the financial institutions on the mortgage home loans they disburse. We casually check through their rates and when we find certain incentives like no application fees, no closing fees, no private mortgage insurance required for down payment less than 20%, we immediately start day dreaming that with little effort we also can become an owner of a priced asset. We start checking further and the moment we feel that we have struck on the best deal, we just proceed further to take a mortgage loan for acquiring a new house or refinance our already existing mortgage home loan.
But then, these advertisements can be dubious and some times, we end up paying more than what we have calculated. We try to find out the reason and then we get the answer that the interest rates are charged on a straight line basis whereas we have calculations on a diminishing balance basis. Immediately, the ground beneath us starts reeling and some may even have a high blood pressure or a mild attack. To escape from all this frustration, we need to understand the difference between the various methods of interest calculations.
Actually, interest rates on mortgage loans are calculated either on straight line basis or diminishing rate basis. Some times it may so happen that a low interest rated loan on straight line basis would prove costlier than a high interest rated loan on diminishing basis.
For example, if you would like to take a mortgage loan of $10,000 @ 12% interest rate on a straight line basis, for a term of 1 year, the repayment would cost you around $10,000 Principal+$ 1200 interest = $11,200 (Total).
But, if take the mortgage loan of $10,000 @12% interest rate on a diminishing value basis, for a term of 1 year, the repayment would be as follows:
First instalment:
$833 (Part payment of Principal 10,000/12months) + $100 (interest @12%) = $933.
Second instalment:
$833 (Part payment of Principal) + $91.67 (interest @12% on (10,000-833)) =$924.67 and so on.
The above calculations are just for explaining the difference between the interest rates. Actually, interest rates are calculated on a yearly basis for loan periods of 15 years, 30 years and so on. As the principal payments in the diminishing balance calculations tend to decrease, naturally, the loans prove to be cheaper than that of the straight line basis.
Here, one needs to remember that the interest payable on home mortgage loans is completely tax deductible to the tune of $1million. It is independent of the fact that you have a number of houses.
An interest rate on a diminishing balance tends to have reduced interest and as such the tax exemption is also comparatively lesser than that of a straight line interest tax exemptions. So, low home mortgage interest means a trade off between low interest and high tax deduction availability. For that, you need to plan aggressively, go to your financiers and request them to clarify the type of interest charged by them and put in the calculations in a paper so that you can come home and again compare the same two to three times for better financial planning.
Further, you need to be very careful with lenders who advertise that they do not charge any transaction fees and so on. Simple logic is Why would any stranger try to process your transaction free of charge without any benefit Either the lender is a new comer in the market or he may be charging some hidden charges. In both the ways, you end up paying more than taking a loan from a lender who clearly states the processing fees charged by him. So, be careful of dubious lenders.
While determining the home mortgage loan amount to be taken up, be careful. Do not take a loan according to your repayment eligibility. Take up a loan according to your repaying ability. Usually, the bankers while determining your repayment eligibility equate around 28 33% of your income towards monthly instalment. But, then, you may have elders in your house that needs continuous medication or your little one is suffering from some ailment. Naturally, in such cases, you need to spend more in their care thereby reducing your ability to repay the instalment. So, calculate properly the amount that you can set aside surely towards instalment repayment and according to that, take up a loan which is well within your financial limits. Do not go comparing with others in this issue. You can be your best judge for successful results.
Of late, some just juggle with the home mortgage loans. They just shift their loans between different institutions just to avoid dishonouring of repayment. Whenever they receive a notice from a banker for repayment of their instalment or else they have to face forfeiture of their house, they just shift their loan to another institution. In this way, their credit rating gets deteriorated and at times of emergency, they end up with no rating and thus no financial institution would be ready to offer them a loan. The result is that they approach some small money lenders who are sure to squeeze the borrowers life long earnings and even their house.
Some even after earning a handsome salary just do not plan properly. They just try to avoid certain expenditure till it comes up to the neck. They are reluctant to honour their instalment payments and just blow away their money in friends and parties. They like to enjoy their life to the maximum extent and when there is a notice from the bankers, they end up paying more than required thereby squeezing their savings with their own hands. Such negligence is not commendable especially in financial planning. You need to have a perfect time table of the liabilities to be repaid and the resources for such repayment. If not, your financial position is sure to go out of your hands and so also your house.
Instead, if you calculate properly, maintain a financial discipline, and increase your credibility, you are sure to get a better credit rating and thereon a low interest home mortgage loan which is a pre-requisite for happy living.
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