For real estate loans, different rules apply than for the classic installment loan. This is not just on the scale, after all, a loan for home buying can quickly be in the six-digit range. There are also a few other special features to consider, such as equity and fixed interest rates.
1. Special features of the real estate loan
Real estate loans differ in some respects from regular installment loans, especially at
- hedging by a “pledge”,
- resulting in the amount of interest,
- the amount of debt and
- the term.
Real estate is, as the name implies, not mobile, they can not be carried away easily. This has great advantages for the banks, making them particularly suitable as collateral. Even a gold watch can be pledged, but it is then usually in the pawn shop and can no longer be used. The house can be inhabited normally, even if it is burdened with a mortgage.
Because these loans are safer for the bank, interest rates are lower. In order to hedge against a decline in real estate prices, the financial institutions usually finance only a part of the house or require higher interest rates, if a higher proportion is financed by loans.
In contrast to installment loans, the debt in a home loan is usually higher, six-figure loan amounts are not uncommon. This also implies a particularly long running time. This is not mandatory, theoretically, real estate loans on small amounts are possible. However, with very small sums, borrowers should consider whether the cost of registering a debt in the land registry should not exceed interest savings.
Install installment loans or special home loans without a mortgage.
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From the point of view of the mortgage banks, these are almost like equity, because in case of insolvency, these lenders would only be entitled to the proceeds of the foreclosure sale, if their loans are repaid.
However, the cost of these loans are higher. Borrowers should consider whether they can bear this burden even if unforeseen costs arise or interest rates rise.
Interest rates are very low. But at least in the medium term, a renewed increase can not be ruled out. This may be a problem for the banks, if in a few years they have to pay their customers higher interest rates on their deposits again, but at the same time receive only low interest rates for long-term loans. You therefore secure yourself twice. Once they try to lend themselves long term money, such as fixed or long-term bonds. But they have to pay higher interest rates, which they pass on to customers. In addition, however, some of the loans are nevertheless financed at short notice. So that the bank does not have to pay more for the refinancing in a few years than it receives money, it secures itself by way of an interest surcharge.
Long-term loans are therefore often much more expensive. However, borrowers should take into account that in return they also get planning certainty. A significant increase can negate any calculation, especially if the interest exceeds the amount of the selected annual rate. In that case, the rate would have to be increased, and those who have just calculated are likely to experience financial difficulties. A longer fixed interest rate can therefore justify a higher interest rate.