Home loan agreements can last for a lifetime, so it is extremely important to know the meaning of many of the more complicated terms in the contract before signing the loan for the purchase of your home. Good guidance and clarification on some key concepts could be the gateway to a smooth home loan agreement. We shows you some concepts that can make a difference.
It is the most important rate for your home loan if you have chosen a variable rate loan. The rates are based on the average interest rates that are practiced on interbank lending, in the Euro zone, among 57 banks. In its calculation, 15% of the highest and lowest rates are always excluded. Interest rates are publicly disclosed at 11 am (Central European Time), usually the 10 o’clock in Portugal. The rate most used in mortgage loans is the rate with the term of 6 months.
Mortgage, in essence, presupposes that there are two elements: a loan contract and a loan guarantee. This actual guarantee gives the money lender the ability to guarantee repayment of the amount borrowed.
The installment is the value that the borrower pays to the lender for the mortgage loan. It is divided into interest and capital (amortization of the loan amount). There are also two types of benefits that vary depending on their value. If the value of the benefit evolves over a life-span of the loan agreement, then it will be a progressive installment. If the value of the benefit is constant throughout the loan, only changes in the interest rate in its revisions, it will be a constant installment.
Amortization is the amount paid by the customer to the financial institution, only for the total amount of the loan requested. That is, it is part of the outstanding capital that enters into the value of the installment. The most used system in Portugal to calculate the amortization is French, which is governed by the fact that less capital and more interest are paid at the beginning of the loan, with the opposite situation at the end of the contract. It may also repay a portion of the capital out of the agreed terms, in which case a partial amortization.
The spread is the percentage that financial or banking institutions add to the interest rate, usually at the Euribor rate. The value of the spread depends on several factors, such as the total amount of the loan, the property valuation, the portfolio and the risk profile of the client or even the subscription of some banking products in the financial institution.
The Annual Effective Rate (APR) is the main rate for comparing the various proposals among the banks for your home loan, since it is through the APR that all the costs associated with the loan you are requesting are presented and weighted, of nominal interest, insurance, valuation expenses, among others. The APR is the interest rate that most closely approximates the cost of credit at the real cost to the customer.
There are two types of interest rate schemes that you can use in your home loan agreement. The most widely used is the variable interest rate, which usually follows the evolution of Euribor rates. If you decide on the fixed interest rate, the same rate is fixed throughout the loan, unless you decide to negotiate the terms of the contract with the institution that granted the loan.