Understanding home loans is a learning
process, but be careful that you don’t get a crash
course after you’ve already taken out a loan that
you can’t repay. The first and most important
step in understanding home loans is to ask all the questions
you can come up with while the process is underway.
Any lender who is worth dealing with will make time
to answer all your questions.
There are several types of home loans. Basic home loans
are a simple exchange. The lender gives you (the borrower)
money that will be used to purchase a home. In exchange,
you agree to repay the money plus interest at the terms
outlined. If you fail to keep your part of this agreement,
you essentially agree that you’ll give ownership
of your home to the lender.
Some lenders limit the amount of the loan to a percentage
of the market value of the property, usually 80 or 90
percent. Others grant loans up to 100 percent of the
market value of the property. Some will even offer loans
to more than the market value, though you typically
have to have excellent credit in order to get those
terms.
In most cases, the amount of your home loan, the interest
rates and the terms will depend on how reliable the
lender thinks you are. That’s usually derived
by looking at your credit report. Keep that in mind
when you’re searching for the best lender for
your home loan. You may not qualify for those rates
being advertised if you have credit problems.
The main mortgage on your home is typically called
a first mortgage. If you have a first mortgage that
only grants a percentage of the value of your home,
you may also take out a second mortgage. That loan is
typically paid on at the same time as the first mortgage
though it’s usually for a much smaller amount
than the first mortgage and will often be paid off well
ahead of the first. The downside is that you’re
paying both loan payments simultaneously and some people
find that to be a real burden.
You may also take out a home equity loan. This type
of loan is granted only if you owe less on your home
than the market value. Home equity is considered an
asset and home equity loans are often much easier to
obtain than first mortgages because you’ve already
established your ability to pay on your home loan. Rates
and terms are also often better for a home equity mortgage,
but remember that you’ll also be making these
payments simultaneously with your first home loan.
Educating yourself about home loans is the first important
step toward making an informed decision when it comes
to buying a home or making your home equity work for
you. |
