How Does a Home Mortgage Loan Work?
Buying a home is the largest financial undertaking most people will ever make. It is a costly investment and one that entails a long-term commitment. For the majority, it takes a home mortgage loan to achieve the dream of owing a house.
It is very important to have a very clear idea of what one is signing up for before taking up a home loan. The main concern most people have is the interest rate but this should not be the only factor that informs the decision of which kind of home mortgage loan to go for.
What's the score?
The US housing markets in most states are showing definite signs of revival after hitting rock bottom with record low mortgage rates and home values. Lenders are broadening their reach but lending conditions are still tight after the defaults debacle that greatly affected most financial institutions and even caused some to close down.
Home loan lenders will be keen on an applicant's FICO credit score. This is a rating of the risk you represent as a borrower. It is based on credit reports from one's borrowing history including other loans you have taken, how you repaid and other details about your financial habits that are used to gauge how trustworthy and reliable you would be in repaying a home mortgage loan. It's important to know which credit mistakes to avoid as a home buyer.
How much house?
The other factor to consider when it's time to secure a home mortgage loan is how much house you can afford. Lenders want to minimize chances that a borrower will default on their loan by giving a loan that they can comfortably afford to pay back. This is determined by income, other financial commitments one has, the total cost of the loan and other factors. It is also advisable for one to use online home mortgage loan calculators to get a clear picture of total cost of the loan, loan duration and to get an idea of adjustments one may have to make in order to keep up with repayments.
First time home buyers especially need to pay attention and do their homework on the options available including incentives they can take advantage of. There are those offered by state and federal governments such as no or low deposit loans as well as lowered credit score requirements. Other incentives offered to those buying their first home are subsidized interest rates, grants, forgive loans, reduced borrowing fees and deferred payments.
Note that there are different loan products that offer different combinations of these incentives and benefits. Some work better than other depending on personal circumstances so getting a clear understanding of them is important.
Fixed or variable?
Generally speaking, it is advisable to take a 30-year loan if the plan is to occupy a house for a period of at least five years. The terms of fixed rate home mortgage loan mean that monthly repayments remain the same. It is also possible to get a 10, 15 and 20-year loan but these are not common. One shortcoming of a fixed rate loan is that interest rates will be higher than those charged on other loans. This is because lenders cannot charge more interest even if market conditions would compel them to do so. They therefore charge more to factor in this possibility.
Any other options?
For those who can afford to take the risk, there are other kinds of home loans. These include interest only, adjustable rate and negative amortization loans. Such loans are ideal for those who have variable income such as business people. They also work well for those who are not necessarily buying a home to occupy it such as real estate investors and those who are buying to rent.
Second time round?
When one is taking a home mortgage loan for a second home, they can borrow against the value of the first home. Second time buyers (or vacation home buyers) can access larger credit lines and at attractive interest rates. This is because they are considered low risk borrowers since they have successfully finished paying for a first home.
Limited down payment?
The most challenging part of getting a mortgage is saving for a down payment. This challenge has been addressed through various programs that make it possible to get a home loan without putting down a deposit. One option is Federal Housing Administration (FHA) loans which has lowered deposit requirements. Another government initiative is the Expanding American Homeownership Act which could bring sweeping changes to the FHA to enable more low and moderate citizens to own houses. Another is the Home Equity Loan Tax Deductions where borrowers get a tax deduction on interest paid for home equity loans.
More to think about?
These are just some of the considerations and options that one has when it comes to a home mortgage loan. It is a commitment that needs a lot of careful consideration because one misstep could cost one a lot and over a long time.
When you're ready to learn more about the home buying process - whether it's your first house or your 5th - download "The Essential Guide to Buying Your First Home" at the button below. The 12-page guide covers options and information for today's home buyer.
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