The highest level of achievement that an individual feels is when he/she succeeds in owning a home. The financial security that comes along with becoming a homeowner is unmatched and it is because of this reason that every person dreams to have a home of their own one day. However, not everyone can afford to buy a house. Some people work for a major part of their lives and still find it impossible to buy a home on their own. Luckily, there are many financing options available to people that they can choose to pay over the course of their life to obtain a home.
With so many mortgage options available, it is natural for potential homeowners to feel overwhelmed. One of the most important features to look at is the difference in home loan rates offered. To help you understand the various mortgage loans and the subsequent home loan rates, here is an overview for every feature of the loan that needs your attention:
Home Loan Rates
When it comes to the rates, you have two options, either opt for the fixed-rate or go for an adjustable-rate mortgage. As the name suggests, the fixed-rate mortgage is one in which the home loan rates stay the same such as a 10-year fixed mortgage rate. That means that the interest that you have to pay remains the same over the term of the loan. When this happens, your monthly payment does not change and hence there is no unpredictability involved. Regardless of what the term of the loan is, the home loan rates will remain consistent.
On the other hand, in the case of an adjustable-rate mortgage, the interest rate gets adjusted or changed from the start of the loan till the end. The change in the home loan rates takes place according to how the cost of borrowing for the lender changes. Most of the homebuyers choose to opt for a fixed-rate mortgage as it has reduced uncertainty.
Type of Loan
Another important feature of the loan is its type. You can either choose a loan that is backed by the Government and is insured by it or go for one that is conventional. When deciding which one to settle for, it is important to outline your goals and objectives. This is because both of the options have their share of pros and cons. For a person who wants to secure a mortgage quickly, a conventional loan is deemed to be more appropriate. It is also considered a great choice for people that seek lower home loan rates.
However, conventional loans have a strict eligibility criterion which makes it difficult for many people to apply for such kind of a loan. Other than that, the down payment requirement is also less for a government-insured loan than a conventional one. You do not need to have a strong credit history to become eligible for a Government-insured loan. Hence, it is your situation that will determine which loan type is ideal for you.
Size of the Loan
Before you start checking out the home loan rates and decide upon the right type of loan, you must have a clear idea about how much loan you require. In the United States, there are two categories that loans fall in based on the size of the loan, Conforming and Jumbo loans. Conforming loans are just those that have an amount that is deemed to be acceptable and conforming according to guidelines set by 2 Government Corporations, Fannie Mae and Freddie Mac. However, these guidelines do not only depend on the amount that you need to borrow. There are also other factors that are taken into consideration such as the credit score, the loan to value ratio, and the debt to income ratio.
The second category is the non-conforming or jumbo loan which simply includes mortgages that have a higher total amount than that set by the guidelines of Fannie and Freddie.
These are some of the most notable features of a loan that you have to look for. It is also important to know that after applying for a particular mortgage, you can still make changes to the terms of the loan by refinancing or getting a second mortgage. There are two basic types of second mortgages available – these include:
Home Equity Loan
This type of home loan is also called a second mortgage. It allows borrower to avail additional financing from the lender based on the amount of equity they have in their home. If a mortgage was taken out by the borrower 10 years ago, and the property value has increased considerably during that time, then the homeowner will have more equity in the house than initially estimated. As a result, they can apply for a second mortgage for personal or business use. Home Equity Loan that is availed to make improvements in your home is tax-deductible.
Home Equity Line of Credit (HELOC)
HELOC is like an open line of credit that is allowed to a borrower to utilize the available funds as and when required. The first 10 years in a home equity line of credit are known as the draw period. During this time, the borrower can withdraw funds based on his/her needs and make payments that account for the interest-only every month. The interest calculated during the draw period varies every month depending on how much money the borrower used and the prevailing interest rate.
Although Home Equity Line of Credit is a great way to control interest expense, it can encourage borrowers to spend more than what necessary since it opens doors to excessive spending. Repayment of loan starts once the draw period of HELOC facility is over and the period can go up to 20 years where the borrower makes fixed monthly installments which include principal and the interest amount. The payments are made until the loan amount reduces to zero.
Concluding Thoughts
With so many home loan financing options available, it is important that a potential home buyer shops around to find the right lender. Apart from that, knowing which home loan rates you are looking for and what to seek in a particular home loan category is very important. Hence, doing extensive research is extremely helpful when deciding on the right mortgage option.
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