Buying a home is a significant investment, requiring careful consideration of factors such as property selection and financing. Choice properties are generally priced higher but possess great potential for passive income and capital growth. Not all homes in prime locations generate the same amount of profit for an investor. Ultimately, an investment property’s profits depend on the costs of financing.
Financing your home
Buying a home is often made possible through mortgage loans obtained from banks and mortgage lenders. Home financing is a decision that can have a significant impact on your finances. Thus, it is necessary to choose the right loan product which answers your needs and circumstances.
Parts of a loan
A loan consists of the principal, interest rate, term or loan period and repayment schedule. The principal refers to the amount you borrow from the bank or mortgage lender. Its interest rate is the fee a lender charges for the use of its money. Interest is expressed as a percentage of the principal and can be fixed or variable.
The term or period of a home loan is the time within which the principal and its interest rate must be paid, often between 25 to 30 years. The loan is usually repaid in monthly amounts or fortnightly amounts consisting of a portion of the principal and interest fee.
A home loan is usually secured by a mortgage which creates a lien on the property being financed. The mortgage agreement allows the lender to foreclose or sell the mortgaged property when the borrower fails to pay the loan at the end of the loan period.
Getting a home mortgage
Obtaining a home mortgage approval hinges on a borrower’s capacity to repay the loan. Lenders ordinarily analyze the borrower’s financial statements, pay slips, bank records and other documents for credit worthiness. Comparisons of regular monthly income and monthly debt obligations are also made.
A lender may still grant a loan to a borrower who is considered a credit risk by requiring a larger down payment or imposing a higher interest rate. The down payment is the portion of the home’s purchase price which the borrower pays to the lender as consideration for the loan. It is deducted from the purchase price of the property, resulting in lower loan amount.
Obtaining a loan approval can be a challenge for investors. There are hundreds of loan products to choose from, each having different features suitable for specific types of borrowers and investments. A mortgage broker can help you find the best loan products to reduce your financing costs and provide sound advice to help you gain the bank’s approval.
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