A home loan, more commonly referred to as a mortgage, is simply a loan that is taken out to purchase a property, to be repaid over a predetermined amount of time. The lending institution will charge interest on the home loan, so that it is to the borrower's advantage to repay the loan as soon as possible, but caution must be used so that the monthly payments are not higher than the borrower can afford.
Types
There are two types of home loans that are most frequently used. The fixed rate mortgage is a loan where the interest rate is predetermined for the duration of the loan. The adjustable rate mortgage, or ARM, is a loan where the interest rate charged to the borrower can fluctuate depending on predetermined financial situations. ARM will have a lower starting interest rate, but it is liable to increase to a higher interest rate than if the borrower had used a fixed rate loan.
Considerations
Commercial lenders will require the person taking out a home loan to come up with a down payment, or money towards the purchase price, before making the loan. The amount of the down payment can vary depending on your credit history, income and the type of home loan selected. Down payments can range from three to 20 percent of the purchase price. Those using a down payment of less than 20 percent will typically have to purchase private mortgage insurance, which is financial protection for the lender in the event the loan is not pair off.
Potential
People who have never owned a home before may be able to take advantage of special home loans designed for first-time buyers. Many programs will allow first-time buyers to make a minimum down payment of three to five percent of the purchase price.
Benefits
The United States government has programs put into place to help those people who may not be able to qualify for a standard home loan through a commercial financial institution. Many government programs are designed to help lower-income families or veterans purchase a home they might not otherwise be able to afford.
Additional Costs
Not only do potential homeowners have to come up with the money for a down payment before getting a home loan, but there are also additional charges that are referred to as closing costs. These fees can range from two to seven percent of the value of the property being purchased, and will typically include money for taxes, title insurance and other costs that require prepayment.
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