Owning a home is a common dream among many people, and for most Filipinos, it remains just that – a dream. The cost of buying a piece of property outright in the Philippines is out of reach for a lot of individuals. Mortgage loans are some ways aspiring homeowners can attain their goals. With a mortgage loan, you can afford to purchase or build a home. Before borrowing money, though, you should know more about the products on the market, and this guide helps with that.
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What is a Mortgage Loan, and How Does it Work?
A mortgage is a loan that gives you funds to buy or maintain a developed lot, residential house, or other kinds of real estate. You can use the money to renovate an existing home or build on land you already own. Mortgage loans also refinance existing lines of credit. What happens is that you apply for financing from a lender and agree to repay the money over a particular period. A bank, credit union, or other financial institution charges an interest. Therefore, your monthly payments cover the principal and interest accrued. With this type of loan, the property acts as collateral. For this reason, the interest rates are usually lower than other types of loans.
Mortgage loans enable Filipinos to purchase townhouses, condominiums, and other residential properties without paying full price upfront. You only need to make a down payment, then the loan pays for the rest. Once you finish paying off the loan and interest, you own the property free and clear. In case a borrower defaults on a mortgage loan, the lender has a right to foreclose on the home. Fixed-rate mortgages are popular in the Philippines. The interest rate, loan amount, and monthly payment terms vary across lenders. So, you must learn how to choose the right options for you.
Mortgage Loan Types
The interest rate is only one factor that determines the structure of a mortgage loan. If you wish to find the perfect product for you, learn what else defines different kinds of products. Lenders tailor home financing to serve varied needs, hence the numerous alternatives on the market. If you are taking out a fixed-rate mortgage for the first time, you might have trouble picking among the wide selection. This section highlights popular loans for Filipinos.
A home loan gives you money at a fixed-rate or variable-rate interest to purchase a property. With this line of credit, you could buy land and construct a house, build a residential unit on a lot you already own, or buy a ready-made piece of real estate. A home loan covers most of the cost of acquiring the property you want. Mortgage lenders give borrowers time, usually up to 30 years, to pay off home loans. The longer the loan tenure is, the higher the rate. Note that the lender essentially owns the home until you finish paying for it.
Commercial Property Loans
Fixed-rate loans are available for commercial real estate. You can take out a line of credit from a mortgage lender to finance a commercial property acquisition. A commercial loan can finance up to 70% of the property value. Thus, you must provide a down payment to cover the remaining equity. As with a home loan, real estate stands as security for the loan, meaning if you default, you lose it to the lender. Filipinos can get commercial property loans for 15-20 years. The loan can be used to buy commercial spaces, such as offices, malls, and warehouses. Alternatively, it can fund the construction of commercial buildings.
Loans Against Property
Although usually confused with a home loan, an LAP is slightly different. The line of credit is given against a property that’s already in your name. Therefore, you are getting a loan against the equity of a property. You can borrow a maximum of 70% of the property value. An LAP can have a variable or fixed interest rate. Lenders offer excellent interest rates and flexible monthly payment terms, thanks to the reduced risk to the lender. You can take out a loan against property using residential or commercial real estate. The funds can be used for anything from medical expenses to business expansion to college tuition fees.
Types of Interest Rates for Mortgage Loans
The interest is the money a lender takes for advancing the cash you ask for. Hence, it changes depending on different aspects. Before setting the rate for a mortgage loan, a lender considers your creditworthiness, the sum you wish to borrow, and property value, among other factors. The rate determines the monthly payment installments and, consequently, a loan’s affordability. Here are the primary interest rates mortgage lenders use:
When a loan has a fixed-rate interest, the interest remains the same for the entire duration. Regardless of the market rate performance during the life of the loan, the lender charges you the same amount. Thus, your mortgage payment installments don’t change. A fixed-rate mortgage is also called a traditional mortgage because this rate type is the most common. A loan can have a fixed interest rate for the length or part of the loan term. The appeal of fixed-rate loans is that they are easy to calculate. You know the monthly payment for the agreed period, thereby, helping you budget.
A variable or adjustable-rate mortgage offers a fixed-rate interest for a short period, then fluctuating prices for the remainder of the term. Mortgage lenders discount the interest at the start of the loan, such that the mortgage payment is lower than the rest of the tenure. With an adjustable interest rate, the cost of the loan depends on market conditions. If rates rise, your monthly payments do too. However, limits are established to cap the total rate hikes allowed over the life of the loan.
When taking out a mortgage loan in the Philippines, you must be sure you can afford it. Just because you qualify for a line of credit doesn’t mean you should take it. Remember, you must repay the loan or risk losing the mortgaged property. Before incurring mortgage debt, learn everything you can about how lenders calculate the payments for a particular product. Below are the chief factors that determine the monthly mortgage payments:
The principal refers to the total amount a lender gives you when you get approved for a mortgage loan. A portion of every monthly payment goes towards reducing the principal balance. In most cases, repaying the principal starts small and increases gradually. It means the amount returned in the first year is lower than what you pay in the tenth year. Conventional mortgage loans focus on paying off a bigger part of the interest in the first years, while the last years are dedicated to clearing the principal. Note that the principal determines the interest rate applied.
Expressed as an annual percentage rate (APR), the interest is a lender’s payment for giving you the loan and the risk you carry. It’s how credit unions, banks, housing co-ops, and other financial institutions make money off mortgages. Due to the collateral the property provides, mortgage loans have lower interest rates than most loans. A majority of products have a fixed-rate interest, which offers consistent payments for the duration of the tenure. The interest accumulated dictates the payments done monthly. A high interest means large installments. Rates vary across lenders and products. The size of the loan, your credit history, and the property value also impact the interest rate.
Property ownership comes with another responsibility – taxes. When calculating how much to pay every month towards total ownership, factor in the taxes applicable. In the Philippines, buyers have to pay taxes, which vary from one municipality to another. For example, you must pay a transfer tax, which ranges between 0.5% and 1.5%. A documentary stamp tax of about 1.5% is another cost you incur. You can lump your taxes in with the monthly mortgage payments. The lender will hold them in escrow until they are due.
When acquiring a residential property, you can get two kinds of insurance. Property insurance covers the house and its contents. Depending on the policy, homeowners insurance protects against natural disasters, fire, and theft. Private mortgage insurance (PMI) is designed to protect the lender in case the borrower defaults. Mortgage insurance is a must-have if your down payment isn’t more than 20% of the property value. You can opt to include the mortgage insurance and homeowners insurance as part of the monthly installments or not.
How to Apply for a Mortgage Loan
Thanks to online applications, asking for a property loan is not complicated. Start by shopping for the best mortgages in the Philippines. Focus on products that meet your needs. For example, if you want to construct a house, your mortgage loan options are different from a home purchase borrower. Compare interest rates from several reputable lenders, and find the most affordable one for you. Once you settle on a mortgage lender, ask about the requirements to ensure you qualify. Although some prerequisites are specific to certain institutions, most are standard.
What You Will Need
You must be a resident of the Philippines to apply for a loan, whether it’s a bank, in-house, or Pag-IBIG financing. So, you must provide a government ID.
If employed, you have to submit a Certificate of Employment, the latest income tax returns for the past 2 years. OFWs must submit proof of remittance for the previous 3-6 months.
For a self-employed applicant, a lender requires audited financial statements for the previous 2 years, 6-months’ worth of bank statements, and income tax returns, including a Statement of Assets and Liabilities for the past 2 years.
If married, a marriage certificate.
Expats must satisfy visa requirements and provide an Alien Certificate of Registration.
You need to include house plans, vicinity maps, or bills of materials in the application.
You must complete a mortgage loan application form. Separate forms are available for co-borrowers.
What Type of Interest Rate to Pick
A good loan is the one that gives you the lowest interest rate possible. It’s why you should shop around for mortgages before selecting one. So, how can you ensure you land great deals? Your credit score influences the interest lenders charge. A high score attracts low rates and vice versa. For this reason, you might want to wait to build your credit score before getting a mortgage.
The property price and loan size are other rate indicators. Expect high-interest rates on particularly small or big loans. When calculating the home price, remember to account for the mortgage insurance and closing costs, which can be included in the loan repayment. You can reduce the interest by paying a large down payment to reduce your borrowing risk.