Understanding the Types of Home Loan Repayment Structure

By: navjeet kaur

Obtaining a home loan is a necessity to purchase a house, especially for common wage earners who are unable to make the payment in full. As the amount of money required for buying a home is big and lending institutions are turning the dreams of home ownership of many into reality by providing the required funds for purchasing a home, they are taken as highly reliable source of money.

However, when you obtain a mortgage, the lenders expect you to repay the home loan on time without defaulting on it. Therefore, you must choose your home loan wisely. The four major factors that you must take into account while selecting a mortgage for you include loan term, interest rates, total cost and repayment structure. To ensure your ability to repay the borrowed amount without any hassle, ensure to choose the repayment structure with great care. For wise decision making, it is necessary to know about the types of repayment structure at first place.

Traditional Repayment
A traditional home loan comes with a simple refund structure which is easy to understand. The borrower is required to pay an installment every month which comprises of the principal amount and interest payment. While the amount of interest payment is larger initially, it diminishes over a period of time. It means, the principal amount turns out to be larger.

This scheme helps you with effective management of your budget, particularly when you have a fixed rate mortgage that accounts for fixed monthly payments. This is because the risk of loan default is minimal in this case. Conversely, opting for this option, you would have to find out whether you are capable of making extra payments or not. However, you might not be allowed to do so in some cases. Besides, you should also make out if you would be charged with penalty in case you repay the loan before the stipulated time. Another enormously vital thing is to identify is how your home equity value will grow as you pay back the loan. The faster you gain equity in your property, the better it is for you.

Interest Only
When you obtain interest only home loan, your monthly payments include only the interest. You are not expected to repay the principal amount. Although, this helps you secure lower monthly payments, you lack the advantage of building your home equity value. It is due to this reason such mortgages are usually opted by home buyers who do not have enough funds with a loan term of two or three years, following which, they switch to loans with traditional repayment scheme. This appears to be convenient, but the risk of getting rejected for traditional loan and getting less suitable terms always exists.

Revolving Credit
This is certainly the most favorable and flexible repayment option. Your monthly earnings go to the loan account from where it can be withdrawn as per your needs. Besides, you are allowed to make additional payments at any time and of any size, thus allowing you to paying off your debt early, saving on interest. Get insight into the repayment options and opt for the one that best match your needs.

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