Buying a home is a huge financial step that permanently changes the household budget for a family. Understanding the different types of home loans before signing any paperwork is a must. Each type of home loan that is available has benefits and disadvantages that should be thoroughly understood by the buyer.
Variable Home Loans
Variable home loans feature interest rates that change with the market. The interest rates that apply to these loans are based on rates released by the Reserve Bank of Australia. Monthly mortgage payments will change with interest rates, so buyers take on the risk that interest will go up substantially in the future.
People who opt for variable home loans are able to access cheques to draw on the equity of the home, and it is possible for a mortgage to be transferred to a different property in the future if this type of loan is selected. There are no penalties for making lump sum payments on a variable home loan.
Fixed Home Loans
Fixed home loans feature an interest rate that will not change with the market. While this allows buyers to budget for their mortgage payments, locking in a mortgage rate also means that a buyer will not be able to take advantages of lower rates in the future. It is important for buyers to understand the market when deciding whether this loan is ideal.
Split Home Loans
A split home loan is a combination of fixed and variable loans. People get to choose how much of the mortgage is covered under each type of loan. The benefit of this loan is that the buyer gets to enjoy the stability of a fixed loan while taking advantage of lower interest rates that may be available through variable loans. However, it is important to note that these benefits are only partially applicable.
Lo Doc Home Loans
Low document home loans are beginning to regain popularity after falling out of favour during the global financial crisis. The fact that these loans require a person to provide little documentation as compared to traditional loans means that people who are self-employed can utilize this type of mortgage to get the financing that they need.
People who opt for low doc loans self-certify their ability to pay for the mortgage. Interest rates on these loans tends to be high, and it is typical for mortgage insurance to be required. This option is a good solution for people who do not have a way to verify their income, but individuals who have a job with a regular paycheck may want to opt for other choices to save on mortgage costs.
Applying for a home loan requires buyers to understand which type of loan to apply for before filling out paperwork. Each of the home loans listed above has positive and negative attributes that should be completely understood you can also work out your fees on a repayment calculator before making that decision.