MANILA, Philippines - Borrowing money to buy for a home can be a very complicated process.
ANC On The Money's resident financial adviser Salve Duplito said that aside from the headline interest rate on the loan, there are a few things you should look at closely in the loan documents.
1. Prepayment penalties
Not a lot of people know that the Consumer Act of the Philippines prohibits banks and other financial institutions from charging penalties if a borrower wants to prepay consumer loans.
Some banks allow this if you want to make an advance payment on the entire loan, but charges penalties if you are paying off a portion.
The law states that any consumer can pay off a portion without fear of penalties.
2. Mortgage redemption insurance
Your bank will most likely require you to buy insurance that will protect them from default in case something happens to you during the duration of the loan, whether death or disability.
You have the right to look around for the best priced mortgage redemption insurance available in the market. You don't have to buy from your bank.
3. Debt amortization
Be careful that your total debt amortization does not go beyond 30% of your total net monthly income. This should include all payments for personal loans, credit cards and other kinds of borrowings.
This is to make sure that you still have space in your finances for long-term investments, education planning and other financial goals.
The danger is if you feel too stressed and tight just meeting your monthly debt payments, you will most likely default and lose your home. And you may put your retirement and education needs in the backseat.
That's bad because if you reach 50, you will probably have paid off your house but no longer have the advantage of the power of compounding to grow your retirement money.
What happens then, you may be forced to give up your house just to fund your medical needs.
Before getting a home loan, be sure you go through the loan process with your long-term goals in mind.
Buy a home that fits your budget. Don't attempt to risk your budget to buy a home you can't afford.
Talk to at least three banks and get them to vie for your business.