How do Home Loans work [Explained]

Finally ready to buy your own home? Clearly, it’s a big financial decision. And almost everyone takes a home loan because of its flexibility and low-interest rate.

While taking a home loan, you will have to consider many factors like interest rates and other added fees. So, it’s essential you understand how home loans work.

In this article, you’ll learn all the essential aspects of a home loan so you can apply for one.

What exactly is a home loan?

Once again, buying a house requires a huge amount of money. And most of the time, we take home loans to buy our dream house. So, simply put, a home loan is an amount you borrow from a financial institution to construct, repair or renovate your house.

When you get a home loan, you can get ownership of your desired house without making the full payment. Nevertheless, you need to pay the loan in installments. Generally, the time for paying the money back is 20 to 30 years in Bangladesh. There’ll be more discussion on the repayment later.

Why do people take home loans?

Yes, you guess it right. As the name implies, it’s obvious people take home loans to build a home that requires more money than their ability. But you’ll see that – even if someone can buy a home, they still choose to seek a home loan. That means people take home loans for other reasons too.

The leading reason is that you can get some tax benefits when you take a home loan. But paying the entire bill case will cost a hefty tax, which is unavoidable for some people. Also, getting home loans are easier now and you can have enough time to repay. A home loan remains the best option for getting your own house.

How does home loan repayment work?

Let’s address your biggest concern…

A home loan is no different in terms of adding interest. Every month you’ll have to pay a certain amount of the loan, including interest.

The amount of your interest for the home loan depends on these main factors as follows—

1. Your prime interest rates
2. Your interest rate on the home loan
3. The bond term you opted for (i.e., 20 for 30 years)

These three factors indicate that your home loan interest rate depends on your bank’s risk while lending you the money. Don’t worry. Your bank will allow you to reduce the interest rate or mitigate the risk in some ways.

How? For example, you can pay the biggest deposit or work on your credit record.

This way, you can decrease the interest rate and save a huge amount of money. That’s a wise decision in the long run.

How do you apply for a home loan?

Once your and your home seller sign the offer for the purchase, you can apply for a home loan. An offer of purchase is a law-binding paper specifying the conditions both you and your home seller must fulfill.

Now, you need to understand what criteria the bank depends on while deciding to approve your loan application. Note that the criteria for home loan applications vary in banks.

But, one factor is common for all home loan lending processes: your bank checking your credit record.

Let’s get into the details…

What is your credit record?

Your credit record reports your overall financial health. In other words, your credit score is a 3-digit number that generally ranges from 000 to 900. And the higher the score in your credit record, you’ll have more chance to get the home loan application approved.

Again, several factors determine your credit scores, such as your debt-paying record, the amount you owe, and the kinds of credit you’ve applied for.

If your credit score is below 600, it’s considered poor. And that reduced your chance of getting a home loan. On the other hand, if your score is above 670, it’s considered excellent. And this score will help you greatly get a home loan with a satisfactory interest rate.

How does the deposit work in a home loan?

Another big concern!!

While purchasing a home generally, people need to pay 10% of the cost upfront. So, this is your deposit. But not all of us have the ability to pay the deposit. In that case, you can look for a bank or financial institution that offers 100% home loans.

Regardless, it’s suggested that you do it if you have the fund to make the deposit. As a result, you will have a higher chance of loan approval, reducing the interest rate.

Final notes

Now that you have a general idea of home loans, you can look for lenders. We recommend doing thorough research to find one that suits you. While comparing different deals from banks for a home loan, you need to check the interest rate first. Additionally, ask your lender to explain the fees included in your loan.