| Financing Real Estate Mortgage loan (Principal + Interest) It is the most common of all housing loans for first time home owners. It may consist of weekly (in some countries) or monthly payments of a fixed sum of money over a number of years; interest may be fixed or floating or a combination. In the initial stages of the mortgage payments where the principal sum is large, a great part of these payment goes towards paying off the interest and only a portion to the principal. Interest is always paid first before principal. This explains why the principal amount owing during the first few years of the mortgage do not seem to reduce. Interest charges are sometimes presented base on the following: 1. Daily rest; interest is accrued daily on the principal sum outstanding. 2. Monthly rest; interest is computed on a month to month basis. 3. Year rest; interest is computed at the beginning of the year. We have to be aware that a 3.25% interest on a daily rest basis may mean higher interest is paid as compare to a 3.26% monthly rest payment scheme over a year. Ways of saving interest Periodic payments Lump sum or periodic cash payments can be made to reduce the principal sum and lessen the burden. Take the example below. e.g. Let us assume a $200000, 30 year term loan at 3.5% interest assuming no changes. By making periodic payments such as monthly additional top ups of $100 will result in a $22,368 savings in interest and a reduction of the term to 25 years. You can enter the figures below and compare the results; one with periodic/additional monthly payment and one without. The amount saved will be exponential with higher interest rates; try it out yourself on the two loan calculators for comparison. Add ons - Current/Saving linked account It may be called by other names but the basic concept is such; the mortgage loan is package in such a manner that it is linked to a fixed deposit or savings account. Any credit in these accounts are used to offset the principal sums outstanding and interest is accrued on the balance. The account holder has the benefit of reducing interest and the flexibility to withdraw from these accounts if there is a need for cash. The only drawback is that no interest is earned on the fixed deposit or saving account. Base on the returns from these accounts it is still worth your while as you will be saving more in interest payments than you will receive in interest on your account balance. e.g. An outstanding housing loan of $200,000 and a saving linked account with a $50,000 balance connected to the home mortgage. Interest will only be accrued and paid on the $150,000 ($200,000 - $50,000) reduced principal balance. More of the monthly payments will go towards servicing the principal amount and expedite reducing the loan repayment period. Refinancing of existing loans Most loans when taken up comes with sweeteners such as legal subsidies and low interest for the first three years, after which it reverts to the normal rates (cost of borrowing + XX). It is possible to refinance such loans but it must be check for any penalty clause for breaking or claw back on interest. In some cases you will be able to maintain a certain sum at the normal rate and refinance the balance at the new rates without breaking the contract and yet having the benefit of the new rates. To qualify you need to have equity in your property; i.e. the value of your property must be greater than the loan outstanding. In cases where it is negative it will not apply. e.g. $200,000 in outstanding loan with the bank (claw back and penalty applies). By leaving $50,000 outstanding under the old contract (4.5%) and entering into an agreement for the remaining $150,000 at the new rate (3.5%), savings in interest payments can be achieved. Interest only loan (Investment properties) In such loans only the interest accrued for the year is paid, the outstanding principal amount is never paid off and remains the same year after year. The rental from such investments goes towards paying the interest on the loan. The property speculator waits for capital appreciation and the opportunity to sell at the right price. This form of financing is popular with property investors and speculators as It minimise cash outflow and holding cost. Example: Principal sum borrowed ($200,000) at 5% interest P A ($10,000) --------------- Amount outstanding ($210,000) Payment made PA $10,000 _________ Amount outstanding next year ($200,000) _________________________________________________________ "Why some people almost always get the lowest interest rate on their home mortgage... and never pay too much in points or "junk" fees!" |
|||