A new home is often the biggest investment that any individual will make in their lives, and most people can’t even completely afford the first homes they purchase, which is why home loans are provided. They are a method of lending money in advance, so that an individual, company or group of people can purchase property and pay it off over a predetermined time – Usually between three and twenty years.
However, mortgage loans are complicated to work out properly, which is why companies like PropertyGuru Singapore offer a convenient home loan calculator, so that you can figure out exactly how you will need to pay, before you commit to a contract.
But let’s first investigate what a home loan is actually comprised of, as well as how you can take advantage of one for your next big life investment.
Understanding the Components of a Home Loan
A home loan will generally consist of three important parts, which let you know the total cost, remaining cost, as well as length of the mortgage. These are all dependent on how much initial capital you have, how much you can repay per month, and the time frame in which you intend to take to pay back the loan. They are as follows:
The principal represents the total amount that you still have to pay off. Initially it will start as the total loan, and as you pay parts off, the principal will decrease. This total covers the expected interest rates as well, but can be dramatically reduced with lump sum payments within the term of the loan.
- Interest Rate
The interest rate, also known as APR, is essentially the cost of borrowing money, and will be a percentage of the total money borrowed. As such, the more money that you need to borrow, the more the interest rate will affect you. Additionally interest rates are dependent on how long you intend to take to pay back the loan. Therefore, by providing as much initial capital as possible and paying off the loan as quickly as possible after purchasing a home, you can ensure that the interest rates don’t cost you more than necessary.
- Amortization Period
This refers to the total length of the loan period, and will essentially count how many months you still have to pay back the loan. This can also be reduced with lump sum or additional payments within the loan period, although you may also have the option of simply reducing the monthly cost rather than the length of time. For example, if you can afford to pay a lump sum of 10 percent, then you can either choose to reduce the amortization period by 10 percent, or the monthly repayments.
Get a Mortgage that Accommodates your Current Situation
There are times in life when you need to utilize some self-discipline and decide whether you can afford the mortgage repayments. An interesting bit of insight that MoneyUnder30 recently shared was that many people make the mistake of getting a mortgage that is too high. And while they may be able to afford the monthly payments, they may also have to sacrifice hobbies or luxuries around the home in order to do so.
This is why it’s important to estimate what you can afford, take your lifestyle, family and current situation into account. Because you may be able to afford to live in a big house, but you may not be able to continue the hobbies you love most, or enjoy weekly family dinners at a local restaurant. So take some time to consider what you are willing to give up for the house that you want, and this should provide insight into whether you can afford it, while still being able to enjoy your current lifestyle.
Planning Ahead – Can You Really Afford the Property?
Another very important factor that Investopedia shares, is that you also need to consider various other possible expenses that may arise in your new home. As you may expect, larger homes are more expensive to maintain, and some have extra features that increase these maintenance costs even further. These expenses can become a serious problem if you’re only just managing to meet the monthly mortgage repayments, and if one problem leads to another, like they usually do, you may find yourself in over your head in debt.
As such, carefully consider the overall potential cost of the home, including monthly mortgage repayments and maintenance, and if you can easily afford to fix whatever breaks and keep the home in top shape – while paying off monthly mortgage fees – then you can truly afford to purchase the property. Additionally, you can also choose to utilize a loan calculator so as to more accurately estimate the expected costs. Because purchasing a property is one of the biggest investments you will make in your life, and you can’t afford to make a mistake in this regard.
With a home loan, you don’t have to spend years saving to purchase your first property. Instead, you can find a plan that works ideally for your current situation, in which you can pay off the mortgage over time, maintain the lifestyle you love most and continue to provide yourself or your family with all the necessities in life.