If I am qualified to borrow, which financing source will give me the best value?

You have a lot of financing options namely: banks, financial companies, sellers and even your relatives and friends. Banks can be the most formal of these in which you would need to fill up many requirements but they can also give you the best value when it comes to your loan. Interest rates that the banks offer are usually lower than the interest rates offered by either in house financing or lending companies. Personal loans can easily be accessed but be careful with personal loans from relatives and friends and make sure that you have a clearly written agreement about payments and penalties. Assess carefully which financing source will satisfy your most important needs.

Having decided that I will borrow from the bank, how will I find the best bank for me?

It is but natural that you apply for a loan with the bank that you commonly use. Give out an application to at least 2 banks and find out which one will give you the best deal. But if you are comfortable with one bank, then go ahead. No two banks would give you exactly the same loan value since each bank would have their own policies and procedures in appraising properties offered as collateral. As a borrower, there can be two very important things for you - getting the lowest interest rate or having the highest appraised value. Ask yourself on what is most important for you.

Do I have to borrow the maximum loan amount?

If you are short in equity and would need a high loan amount, then a high appraisal is necessary. Remember to borrow not in terms of your credit limit but borrow in terms of what you can afford. Many properties have been foreclosed mainly because the borrowers used the maximum loan amount that their credit standing and collateral could get.

Should I fix the interest rate for one, three or five years?

You have the option of fixing the interest rate for a certain period of time. The shorter the time period that you have a fixed interest rate, the lower the interest rate that the bank will charge you.

In borrowing, fixing the interest rate for one year would expose you to the risk of having a higher interest rate the following year. But you also get the benefits of a lower interest in case lending rates decrease. If you fix the interest rate for 5 years, you are protected against any increases in interest rate within 5 years but you would have to get a loan at a higher interest rate.

How long should I borrow money?

The shorter the time period of your loan, then the less interest that you have to pay. Simply put, you pay less interest if your loan term is 5 years than 10. Try your best to pay your loan as soon as you can.

Do I get penalized for prepayment?

In case you have extra money, try your best to pay as much principal as you can. Make sure that you do not get penalized for pre-payment. Read the fine print of your loan agreements and make sure that you consult with your account officer regarding this matter. You can request the bank to write specifically that there would be no pre-payment penalty. Evaluate everything that is offered to you.

What are the costs of getting a loan?

A real estate mortgage is duly annotated in the title and expenses for registration are necessary. Like a car, the improvements have to be insured to protect its value. The costs in obtaining a loan include, Mortgage Redemption Insurance, Registration Fees, Fire Insurance, Documentary Stamps, Annotation Fees and other miscellaneous fees. Ask your lender to compute these expenses before signing on the loan agreement.

Prepare Yourself before You Borrow

In availing of financing, it is best that you prepare yourself by following the simple steps:

Step 1 - First and foremost, determine the house that you would really need. Location selection may be the most important decision and is affected by your place of work, where the children go to school, security, accessibility to public transport, etc. List down the factors that are most important to you and your family.

Step 2 - Save as much money for the equity before you shop for the home of your dreams. This process requires a lot of financial planning and may require that you temporarily give up the other luxuries in life like trips abroad, that expensive car, etc. This means that you may have to prepare years in advance. A good way to do it is you get a vacant residential lot of your choice and pay it in installment payments. Once you have fully paid your lot, then it will serve as your equity and you may now apply for a construction loan.

Do not aim for the minimum equity that the banks would require. Aim for the highest down payment that you can give. You might be surprised that you may have saved enough to pay the property that you want in cash!

Step 3 - Spend time shopping for a home and shopping for a loan. Ask the various lenders on their policies, interest rates, etc. Discuss with them your various financing options. Understand the terms and conditions of the loan that you are taking out.

Step 4 - Make sure that you can afford the monthly payments. As a general rule, it may be best that your monthly amortization not exceed 30 to 40 percent of your net monthly income after taxes. So if your monthly net income is say 40,000 pesos, then a monthly payment of 12,000 to 16,000 pesos should be comfortable.