There are many benefits of home ownership, from tax deductions to equity. Most people do not have enough money in their bank accounts, available to spend on buying a house, which is why home loans are popular. Home loans are widely used as a way to allow people to purchase homes without paying a large amount up of money up front. There are many different types of home loans and the fees and interest rates can vary as well.
Function
The main function of home loans from the borrower's perspective is to be able to buy a house without having to come up with several hundred-thousand dollars or more in cash. Home loans use the principal of OPM, or other people's money, which means you can make an investment by purchasing a property, without using much of your own personal money up front. From a lender's perspective, home loans create profit because of the amount of interest changed, which is basically a fee the borrower pays for the privilege of using the loaned money.
Types of Home Loans
There are many different types of home loans, though the three most popular types are conventional loans, FHA loans and VA loans. Conventional loans generally require 20 percent of the loan as a down payment. FHA loans are insured by the Federal Housing Administration, while VA loans are guaranteed by the Department of Veteran's Affairs, according to the Department of Housing and Urban Development. FHA loans only require 3.5 percent down payment, while VA loans do not require any down payment, but are only available to qualified veterans.
Interest
According to the Department of Housing and Urban Development, the interest on a home loan is the cost of borrowing money. It is expressed as a percentage rate, and is always changing based on market conditions. Interest on a home loan can be either fixed or variable. A fixed interest means a person pays the same amount of principal (money borrowed) and interest payment every month for the life of the loan. A variable or adjustable interest rate usually starts out with low interest payments but later readjusts to higher monthly payments.
Other Fees
In addition to interest, another fee associated with home loans is points. The Department of Housing and Urban Development defines points as fees which are paid to the broker or lender for the loan. These fees are linked to the interest rate, in the sense that the more money you pay in up front points, the lower your interest rate is. Home loans also usually involve loan origination fees, broker fees, application fees, home appraisal fees and other closing costs.
Taxes
Not all home loans are exactly alike, so Lending Tree recommends consulting a tax professional regarding your individual tax situation after buying a home. Lending Tree states that one tax benefit of owning a home is that interest paid on a mortgage is tax-deductible, up to a limit of $1 million. The amount of money paid up-front for points to reduce the interest rate is also tax-deductible. Another tax benefit of owning your home is that in most cases, when you sell your home, you do not have to pay taxes on the profit, up to a maximum of $250,000 profit for a single person and $500,000 profit for a couple.
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