Introduction to Home Loans A home loan, or mortgage, is a type of loan where the proceeds are used to buy or to borrow on the security of a home. In a mortgage, the loan is collateralized on the home, so the lender can take back the home in the event of default. Home loans enable individuals to acquire houses that they would otherwise not afford to purchase. While purchasing a home, a person is not expected to pay the entire amount of the home price at once but pays in equal installments over a certain number of years, which may be fifteen or thirty.
The article sought to answer the following questions; When you apply for home loans they have to consider your credit score, your income, other debts and savings. This enables them to set the maximum loan limit they are willing to advance you and the interest rate they will charge you. The higher your credit score the lower the rate that the lenders will extend to you as a client. The process of lending after you select a loan program and rate consists of the following basic stages
The Down Payment Typically, conventional lenders expect the borrower to make a down payment of at least on the home they intend to purchase. This is proof to the lender that you are serious to make the payments and it is made at the start. The higher the amount you put down, the lower will be your monthly instalments. First timers can afford to make a down payment of as low as a percent in order to afford the loans. As mentioned earlier, VA and USDA loans do not have a minimum credit score requirement for eligible borrowers.
Interest Rates Loan affordability is highly dependent on the interest rate on the loan you wish to take. Today, first time home buyers can borrow cash at an average of percent for a -year fixed loan though the rate varies with finances and type of loan. There are also the adjustable rate mortgages which have even lower initial rate but the rate fluctuates over time. Shop around across multiple lenders to try and secure the lowest rate possible. The credit score, the amount of down payment, the debt-to-income ratio, and the type of loan also determine the rate offers.
Loan Term Lengths For some reason, loan repayment periods are often referred to as -, - and -year loans. The interest rate is determined by the duration of the loan and therefore the longer the term, the lower the monthly payment, but the higher the interest payment. Choose the shortest time that you feel is okay to complete repaying the loan so that even the interest charges are well tackled in the long run. If possible, borrowers should endeavor to make extra principal payments to pay off a - or -year loan earlier without incurring penalties.
The Mortgage Process After having a purchase offer is accepted for a home, a mortgage application is made to the chosen lending company. Apart from financial information, it is also important to include other documents such as ID, income details, tax return and account details. During the underwriting process the lender will order an appraisal to ensure that the home’s value is at least equal to the purchase price and therefore fund it. Before collecting the keys at the closing table, you will be subjected to a final credit check.
Calculating Your Payment Principal, interest, taxes, and insurance are parts of your monthly home loan payment. Other expenses such as the homeowners association fees and private mortgage insurance also come into the picture. Try out different rates, terms and down payments with an online mortgage calculator. It is useful to determine the monthly payment before purchasing a house in advance. The last payment you are to make should be slightly different from the pre-approvals you have incurred.
Escrow Accounts A majority of the lenders will usually insist on having an escrow account that will be used in the payment of taxes and the insurance of the home among other expenses. Every monthly payment you make, a part of it goes to the escrow account. That way, when annual bills are due, the lender pays those bills from the money in the escrow account on your behalf. This makes sure that the taxes and insurance are paid and do not default.
Homeowners Insurance Homeowners insurance is mandatory for lenders for them to protect against liability and property damage hazards. First of all, different insurance companies may offer car insurance at different rates which may range from more than $100. In general, multipolicy and security system discounts can be effective ways to reduce expenses. The annual premium should be expected to cost between 0. 5% – 3% or more of the homes value.
Additional Expenses to Expect Well, apart from the down payment, closing with a home involves various costs. Other closing costs include origination fees from the lender, appraisal fees and title insurance among others. Loan amount for closing costs as a percentage of the total budget, and the percentage of the total loan amount for closing costs. There is nothing wrong with doing a rate check between different lenders and asking what charges they can waive. Often, first-time home buyer programs contain provisions for grants to help with these costs.
Benefits of Homeownership The first and most apparent benefit of paying a mortgage to a house instead of paying rent to a landlord is; you own part of the property with every payment you make towards the mortgage. Another aspect of mortgage is that interest on the mortgage and property taxes are also tax deductible. It is interesting how over half a century, the house gains a significant value and, when one sells the house, a lot of money is taken with it. Owning a home also has some non-financial benefits, including privacy and the ability to make changes to the home without having to deal with a landlord.
I hope this brief guide helps you to understand the process of purchasing a house with the help of a mortgage loan. Please let me know if you need any further clarification or if you have any further questions.
