Buying a property is a dream for many. Transforming a set of empty rooms into a space we call home is extraordinarily pleasurable.
The house is built daily and it is in this space that the sweetest victories are celebrated and the bitter defeats are digested. It is the safe haven for all of us.
However, the first step is to actually acquire the property. The vast majority of the population is forced to take out a loan in order to finance their purchase. Therefore, it is crucial to know how to evaluate the different conditions that each banking entity offers. Once all the information has been gathered, decision-making becomes easier.
In this article, we have gathered some information that you should consult when evaluating the conditions of a home loan.
Payment term
One of the most important points in decision making is the duration of the loan. Basically, you should analyze how long it will take to pay off your debt to the bank.
If you choose a shorter payment term, the monthly installment will be higher. On the other hand, if you prefer to extend the payment period, the amount spent each month will be lower.
Carefully study both options. This is because, if you prefer to pay over a longer period of time, the total loan will be more expensive – due to the continuous payment of interest rates.
Interest rates
All loans you take out come with an interest rate. This rate is a percentage that reflects the cost of using the borrowed money. Basically, it is the amount that banks benefit from providing financing.
It is important to understand that there are several types of interest rates:
Variable rate
In simple terms, this percentage is reviewed periodically. This results from the sum of two values: the referring rate – Euribor – plus the spread.This means that the amount to be paid every month is not constant and that, many times, you may see this amount increase.
Flat rate
Unlike the previous one, the fixed rate means that interest costs are constant. In this scenario, you will not have to worry about Euribor fluctuations, influenced by many factors beyond your control.
Mixed rate
As the name suggests, this modality incorporates the previous two. In this option, you can choose a fixed rate for a period – 2, 10 or 20 years – and, for the remaining period, a variable rate will be applied.
TAEG e MTIC
When comparing different offers, pay attention to the Global Effective Annual Rate (TAEG) and the Total Amount Imputed to the Consumer (MTIC). These are two indicators that reflect all loan costs. That is, in addition to interest, other costs such as commissions, insurance, taxes and other charges are also considered.
The APR calculates all costs as an annual percentage of the loan value. On the other hand, the MTIC represents the sum of the credit amount with the remaining charges that you will have to pay during the contract.
Basically, the lower these indicators are, the cheaper the credit will be. However, it is important to remember that a lower monthly installment is not always synonymous with cheaper credit in the end.
Effort rate
This amount is no more than the percentage of the household's total income intended to service the loan. In a simpler way, it is the weight that the provision has on the value received by the parties involved. This rate is very useful, as it helps to understand whether there are conditions to cover daily expenses, after paying credit obligations.
Ideally, the rate should not exceed 33% – equivalent to one third of the household income.
Calculation: (Monthly credit amount / Monthly net income) x 100
Example 1:
Income = €2000
Installment = €650
Effort Rate = 32.5%
Example 2:
Income = €1500
Installment = €800
Effort Rate = 53.3%
Assessing the conditions of a loan is essential to ensure that purchasing the property does not become a financial burden in the future. It is important to consider all aspects, from the duration of the loan to the different types of interest rates, to make an informed decision suited to your needs and financial capabilities.
By analyzing the offers, by considering the APR and MTIC, you can understand the real cost of credit. Furthermore, ensuring that the effort rate remains within acceptable limits is crucial to maintaining financial health and ensuring that daily expenses continue to be managed without difficulties. With careful assessment, it is possible to take this important step with confidence and security.
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Source: Imovirtual
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