Finding the best deal: how to find Cheap Home Loans?
Owning a house is everyone’s dream these days and that too financed with cheap home loans. No doubt, cheap home loans would be a subjective term. For some people it might mean paying a low interest rate while for others, it might mean paying the smallest possible amount upfront. Hence it would not really be possible just look for the cheapest home loans per se. Instead it means whether we get the loan with the features we desire, the one which we can manage easily. If we are able to get a loan with the terms we desire, then the price of the loan becomes secondary and the loan in fact becomes ‘cheap’ for us.
The cheapest loan for a specific buyer might not be the cheapest loan for his neighbor. This is because each buyer’s characteristics are different. The propensity to prepay, how long the term of the loan is going to be, the capacity for the monthly payments, the size of the down-payment, all are characteristics that are different for each individual buyer. A cheap home could thus mean:
The lowest interest rates and low origination fees
When one reads the phrase, ‘the cheap home loans’ the first thing that come to mind is a loan with a low interest rate and low origination fee. Origination fees are fees that have to be paid to the bank and normally expressed as a percentage of the loan amount. On the other hand, the interest rate is actually the cost of the loan and is the most representative of the cost of the loan. Nevertheless the origination fee, expressed as a percentage of the size of the loan and the interest rate on the loan are most commonly taken as the ‘cost’ of the loan. For a person who is mostly concerned with these criteria, the simplest loan structures with no frills can be the cheapest one.
One that allows you to save on interest fee
If we want a low interest rate loan, it is not necessary that we obtain one that has a low interest rate upfront. We can still chose a high interest rate loan and yet avail the advantages of a low interest rates. This is done through the use of offsetting accounts. In this facility a savings account is linked with the loan amount and the return on the saving account is utilized to decrease the interest rate on the loan. For example, if we have $10,000 in our savings account and we have a $200,000 amount due on our mortgage, we will only be charged interest on $190,000 because the return on the $10,000 will offset the interest cost on the $10,000 in our savings account. The overall result is that we are decreasing our overall interest cost. However there is caveat in this arrangement in that we will be required to keep the balance of $10,000 in the savings account and would not be allowed to utilize it if we are to keep on availing the facility.
The home loan that is flexible in the way it lets us use our money
Taking a home loan is no doubt one of the biggest financial obligations we undertake and in fact the biggest financial instrument we are going to use in our life. Hence no wonder it will interfere with our cash management and influence the way we manage our money. Sometimes it happens that we have extra money on our hands and we like to use it to decrease the outstanding amount on our home loans. However some loans have a prepayment penalty associated with them that does not allow us to prepay any amount in excess of what is due. The prepayment clause can be invaluable to some buyers who want to prepay the loan amount and save on any interest cost.
When we chose the cheapest available loans in the market, we must take care of a few things. If we want cheap home loans, one option would be to go for the basic home loan. However we must be careful that there a few strings attached to the cheapest home loans and that we are getting what we paid for.
Cheap loans have few extra features. We must be aware that even though we might be availing the cheapest possible home loans, we are getting very few extra features and that the loan will not be customizable greatly to our own terms. For example, the basic home loans are not flexible in that they do not allow us to prepay our loans. Also there is a lack of other features like offset account as well.
The cheapest home loans are sometimes in the form of variable interest rate loans. This can especially be helpful in today’s times as these days interest rates are one of the lowest in history. The adjustable rate loans are not linked to long term interest rates like the rate on the 10-year bond but linked to short term rates like he prime rate which is linked to short term treasury rates like the 1-year treasury rates. Due to the stimulus being provided to the economy these days, the short term treasury rate is currently one of the lowest in history and this is a good time to avail short term interest rate loans.
So we see that the one of the best way to gauge whether a home loan is cheap or not is to check interest rates. This is the single most important factor that affects the amount the person has to pay for the loan. However there are other factors as well that change the cost profile of the loan. This can be prepayment options, origination fee, offsetting accounts and so on. Home loan comparison calculators allow for the comparison of different home loans so that one can see which factors affect the price of the loan and which ones are cheap home loans. Really the cheapest home loans for us would be ones which us the best value for in money in terms of how they satisfy our own needs.