For many people, buying an apartment or house is the biggest expense they will spend in their lives. In most cases, this is not possible without a loan. Although the home loan only opens up the possibility of owning a home for many people, it also represents a considerable burden over many years. In order for the purchase or construction of the home to be a complete success, it is very important to find a suitable one To choose credit. This article introduces some things to consider when choosing.
Plan your home loan carefully
As already mentioned in the introduction, buying a house is often the greatest expense of all life. The credit required for this is therefore correspondingly high. As a result, you should always proceed with special care here.
If you compare many different options here and carefully examine all options, it is often possible to find a slightly cheaper loan. Take the time to do it! Due to the high loan amount and the long term of the loan, even minimal improvements can have a very high impact.
When planning the house loan, make sure not only that the interest is low, but also that the other conditions are right. For example, it is very important that the amount of the monthly installments corresponds to your financial options. If the rates are too low, you will have to pay off the loan unnecessarily long and therefore pay high interest. On the other hand, if they are too high, this can cause problems with the repayment and, in the worst case, even lead to a debt trap.
How much credit do I need for my financing project?
The loan amount depends not only on the purchase price of the house, but also on the savings that the buyer can bring as equity. The more you can pay yourself at the beginning, the lower the loan. In addition to the purchase price, the additional costs of buying a house must also be taken into account. Notary fees, real estate transfer tax, brokerage fees and entry in the land register are also incurred. It is therefore best to first consider how high the loan may be so that you can afford it and then look for a property in the right price range.
Loan for a house – the question of equity
There is a wide variety of views on the necessary equity for a house loan, ranging from advice on full financing in the current low interest rate (as of 2014) to an equity component of 40% or more. If you want to know how the banks value the equity component, you only have to make an interest comparison for different mortgage lending values. The mortgage lending value is the value of the property to be financed. A mortgage lending value of 50% therefore corresponds to an equity component above 50% (because additional costs of around 7 to 12% still come at the pure purchase price). Here is a comparison of the cheapest effective interest on the market for a construction sum of 150,000 USD with an initial repayment of 2.00% and a fixed interest rate of 10 years (as of November 25, 2014):
- 50% mortgage lending value: 1.41%
- 60% mortgage lending value: 1.61%
- 70% mortgage lending value: 1.61%
- 80% mortgage lending value: 1.63%
- 90% mortgage lending value: 1.82%
What does an interest rate difference of 0.41% mean over a period of 25 years of repayment, i.e. the difference between only 15 to 20% equity or 60 to 70% equity? The necessary part-time costs are taken into account. In addition, it should be assumed that the interest rate differential will remain roughly at the current level even after the first fixed interest period of ten years has expired. The loan calculator provides quick information: 0.41% for a loan amount of 150,000 USD makes a financial difference in terms of interest costs of 7,844.41 USD over a 25-year term. Added to this is the aspect that the buyers with a high equity component may be able to pay off much less, which in turn reduces the interest burden again. In this way, despite the small interest rate differential of less than half a percent, there is a significant five-digit savings.
The amount of interest – an important factor for home loans
When you take out a loan to buy a home, the key factor is certainly the interest rate. Of course, this should be as low as possible. For example, if you take out a loan of over 200,000 USD, a difference of one percentage point within a year makes a difference of 2,000 USD. Add to that the compound interest over the years. Therefore, small differences in this area can have a huge impact.
When you take out a loan, you will always find several details regarding the interest rate. On the one hand there is the nominal interest rate, on the other hand there is the effective annual interest rate. The nominal interest rate tells you how high the actual interest rate on the loan amount is. When calculating the annual percentage rate, all other fees are also integrated into the calculation.
If you compare the different offers with each other, it always makes sense to use the effective annual interest rate. So you can always see what total costs you will have to face. Because even if the nominal interest rate is low, high fees can make the loan ultimately very expensive. It is therefore always advisable to use the annual percentage rate for the comparison of interest rates.
In order to find a cheap home loan, it makes sense to compare as many offers as possible. It is therefore advisable to ask as many bank branches in your area as possible to obtain an offer.
However, this task is much easier if you use a credit comparison on the Internet. These computers do this work in seconds. This way you can see immediately where interest rates are particularly low.
The loan comparison on the Internet is not only very fast, but also particularly extensive. If you inquire personally in the bank branches, you are always limited to the offers close to where you live. A credit comparison on the Internet, however, includes significantly more alternatives. Therefore, it is often possible to find a particularly cheap loan in this way.
Design of the initial fixed interest period for a house loan
The initial fixed interest rate period in turn influences the effective annual interest rate. The rule of thumb is: the shorter this fixed interest period, the lower the banks’ interest. Again, a small comparison for different initial fixed interest periods with a construction sum of 150,000 USD, an initial repayment of 2.00% and – for the sake of comparability – a uniform mortgage lending value of 80% (the most favorable interest rate on November 25, 2014):
- 5-year fixed interest rate: 1.29%
- 10-year fixed interest rate: 1.63%
- 15 years fixed interest rate: 2.06%
- 20 years fixed interest rate: 2.39%
- 30-year fixed interest rate: 2.61%
In the comparisons presented, the attentive observer notes that the duration of the initial fixed interest period currently has a greater influence on the interest than the amount of equity. This is indeed the case, but it is a phenomenon in 2014 with the lowest interest rates in the market due to an Capital Lender key rate close to the zero limit. Mortgage rates are at their lowest ever in over 60 years. In German post-war history, mortgage financing was definitely never that cheap. The banks are currently calculating this: they suspect that interest rates will soon rise and therefore raise the interest rate quickly if a builder or buyer wants to secure the low interest rate in the long term. Nevertheless, this is recommended: It would be inconceivable that mortgage interest will still be around 2.61% in 25 to 30 years (as with a 30-year fixed interest period). They could also be 5.00 to 8.00%, as was the case in the 1990s. Forward-looking builders therefore secure the current low interest rates in the long term.
Calculate the amount of the installments
When taking out a loan, it is very important to plan the amount of the installments with care. Too low rates result in a long term. On the other hand, excessively high rates represent a considerable burden. You should therefore think carefully about the amount you choose here.
So first think carefully about how much money you can spare each month. An interest calculator can then give you information about the loan amounts and the terms that are possible.
It is very positive if you agree on a loan that allows special payments. This way you can set the monthly installments so that they do not put you in financial distress. If you still have some money left, you can make a special payment and thus significantly reduce the remaining debt and thus the interest to be paid.
Take creditworthiness and other collateral into account
When you take out a home loan, the bank that issues the loan always carries out a credit check. It checks how high your income is compared to the amount of the loan applied for. It is good if the income is very high compared to the loan.
If you have a high income, the chances that you will no longer be able to pay the installments are relatively low. However, if the income is low, the risk of default for the bank increases. In this case, therefore, it generally charges significantly higher interest rates.
If you have a low credit rating, it may make sense to offer the bank additional collateral. So you often have the opportunity to get a cheaper interest rate. When you buy a house, it is always a good idea to enter a land charge. In an emergency, the bank can then access the property to assert its claims.
Another possibility is to name a guarantor. If there is someone in your family who has a high income and fully trusts you, this also offers the opportunity to improve the credit rating. If you own other items with a permanent value, you can also use them as collateral.
State subsidy for homes
If you want to buy your own home for old age at an early stage, you can, for example, receive an annual basic allowance of 154 USD plus child allowances (185 or 300 USD, depending on the year of birth) with the so-called “residential Riester”. To do this, the loan agreement must comply with certain rules that should be discussed before buying the house. Another government grant comes from Cream-Bank. With this bank, home buyers can receive up to 50,000 USD in a very cheap loan. The house bank must make the application forms available to the buyer. Additional promotional loans can also be applied for through the various federal states or the respective municipalities. If you already know where you want to live, you can specifically ask. Another option for saving money is the church leasehold law in some regions. The property does not have to be bought, but is leased for so long that the construction of the house on it is worthwhile.
Beware of problems with the Credit Bureau
If you ever had problems repaying a loan, a Credit Bureau entry can occur. Most banks control this detail and only grant the loan if you have a clean slate in this area.
There are also banks that grant loans without a Credit Bureau check, but the interest rates are usually quite high. Therefore, the loan is a particular risk in this case and it is advisable to consider carefully whether it is really necessary.