Cracking home loan jargon: Key terms you need to know!

To make the most out of a home loan you need to know and understand what the basic terms that come with a home loan are. Unfortunately, there are many Aussies that need to brush up on the basics of home loan financial literacy to avoid being caught in a jam. Here are a few basic terms that can help you navigate your way to the right home loan for you.

Conveyancing-

Whether you are buying or selling a property you will need a conveyancer who will help you through the transaction of a property between a buyer and seller. A conveyancer’s job is to ensure that the buying and selling of property runs smoothly and is legal. This will also ensure that the transaction of the property is fair for all participants. However, it is vital that you choose an accredited conveyancer to avoid any hiccups that can end up seeing you losing the house and costing you financially.

Offset accounts-

There are plenty of home loans to choose from that come at a competitively low rate to suit your finances. Knowing what features to compare can help you save in the process and also decrease the number of years it will take to pay back your home loan.

An offset account is one of these nifty features that can reduce your interest on your home loan payments.

Bill Tsouvalas, CEO of Savvy, points out that it is important that borrowers choose a loan that has features that can help them maximise their loans, ‘Others may not have the right structure such as offset accounts or redraw facilities to save them money right from the get-go’.

You can get a transactional account that is attached to your home loan which means that the interest is applied to a portion of the loan instead of the full amount.

For example, if you have taken out a home loan of $200,000 and have attached an offset account with the value of $50,000 in it, interest on the loan will only be applied to $150,000 of the loan. The more you put away into your offset account the more you save on interest.

Comparison rate-

Finding an affordable home loan means that you will need to compare a number of products. One of the most important features to compare is the comparison rate. The interest rate will simply show you how much interest will be charged as a percentage of the loan. A comparison rate is expressed next to the interest rate and takes all the fees and charges into consideration. It is by law that lenders advertise this rate next to the interest rate to help borrowers make an informed choice.

Lenders Mortgage Insurance (LMI)-

First time home buyers can find themselves in a muddle when it comes to home loans but ask questions about things that you’re unsure of can prevent you from making a costly mistake.

Research released by ME revealed that 88 per cent of first home buyers did not understand what Lenders Mortgage Insurance was or misinterpreted it to be something that will protect them, but in actual case protects the lender if you are unable to repay your mortgage.

LMI is a premium that is charged to borrowers who are considered a high risk. For example, if you take out a home loan that is more than 80 per cent of the value of your property and have little documentation to prove your financial standing you could be charged LMI to protect your lender.

Home loan jargon can be tricky to understand at first, especially when buying your first home. So, hopefully we’ve helped to clarify the meaning of some key terms you’ll encounter when buying a home.

For more tips take a look at 12 steps to get into your own home and nine things to consider before buying a home in the suburbs.