One of the most frequent questions I receive from website visitors who are interested in the purchasing properties is about Real Estate Financing.
Basically, there are three most commonly accepted methods of paying for any real estate and they are the following:
Basically, there are three most commonly accepted methods of paying for any real estate: Spot Cash, Deferred Cash and Mortgage Loan. Each of these is explained in detail in the succeeding paragraphs.
1. Spot Cash – You will be required to pay the whole selling price within a period of time, usually within one month. Considering that not everyone has a large reserve of cash that can be pulled out anytime, real estate properties are seldom bought on Spot Cash. For some, it also doesn’t make sense to put so large an amount on one property especially if there are other investments and expenses to consider.
When paying Spot Cash always check if you can get a discount on your purchase. Most properties sold by real estate developers are discounted when purchased in cash.
2. Deferred Cash – Like Spot Cash, you still have to pay the whole amount within a specific period. But in the Deferred Cash Method, the payment term is a little longer, say 6 months to 24 months without any interest incurred. For some investors and buyers, this is still too much on the budget.
3. Mortgage Loan (Bank Financing or Pag-IBIG Financing) –This is the most popular method of financing a real estate purchase. The primary advantage of this payment method is it allows for a longer payment period. Mortgage Loan can be paid from 3 years up to 30 years depending on your qualifications.
How Mortgage Loan Works
Mortgage Loan is a form of secured loan where you pledge the property as collateral for using the lender’s money when buying the property. Mortgage Loans are available in financial institutions like your banks, Pag-IBIG Fund, credit cooperative, etc.
To further understand how mortgage loans work, consider this scenario:
You want to buy a house and lot unit from a local real estate developer know for its middle-end projects targeting Overseas Filipino Workers. It’s a two-bedroom house on a 150-sqm lot. The selling price of the total package is PhP 3,000,000 (P 3M) .
Your real estate agent says, the reservation fee is only PhP 30,000 which forms part of the down payment. Moreover, the minimum down payment is 20% of the selling price. The 80% balance should be financed by getting a mortgage loan from a bank.
In summary, here are the details concerning the money matters of the deal:
Selling Price = PhP 3,000,000
Reservation Fee = PhP 30,000
Down Payment = PhP 600,000
Amount Of Loan = PhP 2,400,000
When you decide to purchase this property, you will be required to first pay for the reservation fee, 30,000 in this example. Usually after a month, you will be asked to pay the whole 20% down payment less the reservation fee (meaning PhP 600,000 – PhP 30,000). Then finally, you will pay a visit to the bank and apply for a mortgage loan on the 2,400,000 balance.
From the above scenario, we can deduce that there two very important payment components you need to be mindful of when using Mortgage Loan to finance a real property.
1. Down Payment — When you apply for a loan, the lending institution will not grant you an amount that is equivalent to the selling price of the property. You need to come up with cash to make up for the difference. That money is called a Down Payment and you pay it to the seller, before the loan process actually begins. Sometimes you encounter the term EQUITY and in this context it is synonymous with down payment. It represents your stake, or ownership, or interest on the property. This, too, becomes a collateral when you apply for a loan.
2. Loan – This is the money that you borrow from the lender that will be used to finally pay for the balance on the whole property. Of course, there is a price of using borrowed money. The loan actually comes with an interest. Your Loan Mortgage Contract will stipulate the number of years the whole loan plus interest will be paid. The process of paying for the loan principal plus interest is referred to as amortization.
Mortgage Loan Payment Terms
There are real estate seller who allow for installment payment on the down payment. This usually doesn’t incur any interest, but is usually payable in short term, say six months.
Some say that the real price of the property is determined by the total cost of paying the loan.
And it’s true. A Mortgage Loan comes with interest which you will be paying from the first monthly amortization until the last. The monthly amortization has two components representing the principal and the interest incurred for that month.
Actually, the amount of monthly amortization is determined by the interest rate and the loan term. A short-term has low rate while a long-term loan has a high interest rate.
If you can afford it, you will actually save if you chose a short-term loan.