What you need to know about home loans

Mortgages and home loans are generally used interchangeably. Regarding home loan, property is served as collateral to guarantee the loan. But mortgage can be defined as an agreement that legally protects lender’s rights over the property. This situation provides that the lender can take the property as foreclosure.

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Definition of Home Loan

Home loan is a loan used generally to purchase a residential home. Home loans rates are either adjustable or fixed and these rates are also specified your mortgage rates. In order to understand how a home purchasing process carried out in the healthiest way, the differences between home loans and mortgages should be known.

Mortgages and home loans are generally used interchangeably. Regarding home loan, property is served as collateral to guarantee the loan. But mortgage can be defined as an agreement that legally protects lender’s rights over the property. This situation provides that the lender can take the property as foreclosure.

Nowadays it is very simple to evaluate the options of home loan and find the loan that suits the person. There is even the possibility of choosing a loan near the person using a few of online home loan calculators.

This article contains very useful information, especially about first time home loan buyers. If you’re in a hurry to start a home loan process, please don’t ignore details such as home loan interest rates, types and terms.

Types of Home Loan

It is impossible to say that there is one-type of mortgage for each person. According to person’s income, budget or payment plans, s/he may choose a short-term loan with high amount of payment per month or a long-term loan with lower amount of payment. Before getting a mortgage loan and coming close to your dreams, make sure you gain insights about the mortgage loan you choose. This is because a mortgage loan agreement has not only advantages but also disadvantages.. Let’s see some opinions that will be useful for especially first-time home buyers.

Fixed Rate Mortgage (FRM)

FRM is the safest mortgage to require a fixed interest rate and principal amount. If market interest rates increase, the borrower keeps paying with the same interest rate during the life of the loan. On the contrary, even if market interest rates decrease, the borrower is able to refinance the mortgage loan and pay with the lower rates and it may be the most important advantage. In general, the FRMs have a 15-30 years term.

Interest Only Mortgage

Interest Only Mortgage is a type of loan payment, which lets you repay only the interest part of your monthly payment throughout the life of the loan (the first 5-10 years) and then the principal after the loan finishes. Thus you don’t have difficulty to repay but make sure it will take a long time.

Adjustable-rate Mortgage Loans (ARMs)

ARMs are another way to repay. Throughout repayment of ARM, its interest rate may increase or decrease over time. The interest rate changes and adjusts due to the economic fluctuations and the cost of borrowing money. So if you can foresee the change in interest rates and you think this will be your benefit, you can opt for this loan repayment method.

We have to say that a lot of homeowners have been in financial difficulty with the above mortgages (Interest Only Mortgage and ARMs) throughout the housing bubble years.

Mortgage Loans by The Federal Government

The Federal Housing Administration (FHA) Mortgage Loan

FHA home loans is a mortgage managed by the federal government. The down payments are less compared to others. And all the borrowers get this loan; there is not obligation to be first-time homeowners. If you have low credit scores or dream to be a homeowner with a small down payment, it is a good opportunity for you.  That being under the guarantee of FHA minimizes the risk for both borrower and lender. The only disadvantage is that the FHA requires built-in mortgage insurance to protect the lender’s rights, in case the borrower may not repay the loan. So this mortgage insurance will increase the cost of your monthly payment.

The U.S. Department of Veterans Affairs (VA)

VA manages another government mortgage loan and it is called VA loan. It is similar to FHA loan, but its difference is that just military service members and their surviving spouses can benefit from it. There is no a down payment and this program offers 100% of Financial Need.

United States Department of Agriculture (USDA)

There are also other mortgage loans offered by the federal government. For example, another of them is USDA. Their conditions are similar, but this loan is offered to rural borrowers.

Other types of Mortgage Loans

Balloon Mortgage is a type of loan that demands the borrower to repay regularly with a fixed rate and fixed interest rate at a particular time. It is a short-term and then it requires the borrower to repay the rest amount of loan at once. Although this type of loan provides convenience at the beginning of loan period, the borrower may need other financial funds to make a large amount payment by the end of the loan.

Jumbo Mortgage is known a type of mortgage loan that offers high credit quality, high interest rates. Due to its size, it has a huge risk for lender, compared to other loans. In general, this loan is purposed to finance luxury properties and villas in competitive real estate market. It is also required that the borrower has to fulfill unique underwriting requirements and tax implications.

Conforming Loan is a type of loan that provides the credit with equal to or less than the dollar amount established according to the loan limit determined by the Federal Housing Finance Agency (FHFA). More precisely Fannie Mae or Freddie Mac, which are the state-controlled companies that buy and sell mortgage-backed securities, they purchase loans from the lenders and sell these loans to investors.

Didem Sagindik
is a Sr. Research Analyst at Financhaser, focusing on Loans. She has PhD on Business Management.

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