What is a Home Loan?
The purchase of a property might represent the single most valuable asset a person acquires in their lifetime. If that property is a home, then it is highly likely that a home loan will be needed to make the investment possible. Loans are not unfamiliar territory – finance is often needed for the purchase of vehicles or business equipment, for example, so how do home loans vary from other kinds?
The key difference between home loans and other sorts of loans is the terms and conditions that are attached to a home loan, or mortgage, arrangement. Usually a home loan is repayable over a fairly lengthy timescale – traditionally somewhere between 15 and 30 years. A deposit has to be paid in order to secure a loan, and this is normally a percentage of the value of the property; in different neighborhoods, cities or states this could be anywhere between 5% and 20% of the property value. Interest rates and types of mortgages vary considerably, but the bottom line is that the borrower commits to repaying the loan over the term, or the number of years agreed, and at the end of that term the property is free of debt – the owner’s home is their castle.
Understanding Terms and Conditions
Very few people can afford to buy their home outright, and home loans often make it possible to get started on the property ladder, or to upgrade when a growing family demands more space. Sometimes a property is in need of a bit of fixing up; extending an existing home loan, instead of taking out a new loan with a bank or finance company, can help with this too.
With so much choice available, the terms and conditions attached to home loans are very important. For example, a conventional mortgage might have a slightly higher rate of interest than a flexible one, but the monthly funds required will stay the same throughout the repayment period of the loan. Flexible, or adjustable-rate mortgages (ARMs) generally have lower introductory rates of interest fixed for maybe five or seven years. After this, the rate will fluctuate every year during the rest of the repayment period.
There are also government-insured home loans via the Federal Housing Administration (FHA) or the Veterans Administration (VA), serving buyers of more modest means and properties, and jumbo loans for high-flyers in a high-priced property market.
Finding the Right Home Loan
Standard mortgages are a safe bet – they suit people who have a good credit rating and do not mind slightly higher interest rates because they are comfortable with payments that will remain fixed and steady over the years.
ARMs have variable rates after the initial fixed period but – unless interest rates soar unexpectedly – generally a lower cost overall. They are useful for homeowners who plan to move on within reasonably short time periods, say five years.
FHA and VA loans have a low interest rate and a low down payment, and are most suitable for cheaper properties and buyers who have a medium credit rating.