Choosing Between Home Loans And Mortgages

Choosing Between Home Loans And Mortgages



Choosing Between Home Loans And Mortgages
Home loans and mortgages are asset-acquiring facilities that relieve an​ individual from making immediate lump sum payments .​
a​ home equity loan creates a​ debt against the​ borrower’s house .​
According to​ this loan,​ the​ borrower has equity in​ his or​ her home as​ collateral .​
‘Collateral’,​ here,​ refers to​ assets or​ properties that create a​ debt obligation .​
In real estate,​ the​ borrower’s equity in​ an​ asset refers to​ the​ difference between the​ market price of​ a​ property,​ and the​ borrower’s home equity loan .​
Equity is​ the​ interest that a​ borrower pays on​ the​ loan.
A mortgage,​ on​ the​ other hand,​ is​ a​ process of​ using property as​ security for debt repayment .​
It is​ a​ legal device used for securing an​ asset .​
By arranging for mortgage,​ a​ borrower can acquire residential or​ commercial real estate,​ without the​ need to​ pay the​ full price right away.
Choosing between Home Loans and Mortgages:
- Most home loans require the​ borrower to​ have a​ very good credit history .​
Hence,​ individuals with an​ average credit history are likely to​ be denied this loan.
- ‘Closed-end Home Equity Loan’ levies a​ fixed rate of​ interest for a​ period of​ up to​ 15 years .​
The borrower receives a​ lump sum amount at​ the​ time of​ settlement,​ in​ the​ final steps of​ a​ transaction .​
No further loan can be given to​ the​ borrower once the​ final settlement of​ a​ real estate transaction is​ executed .​
The maximum amount of​ money that can be given as​ loan to​ the​ borrower depends upon his/her income,​ credit history and appraised value of​ collateral,​ and other finance related information.
- ‘Open-end Home Equity Loan’ is​ a​ revolving credit loan that generally levies a​ variable rate of​ interest .​
The borrower can decide when and how frequently to​ borrow money against the​ equity .​
This again is​ determined on​ the​ borrower’s good credit history,​ consistent income and other such criteria .​
This loan is​ available for a​ period of​ up to​ 30 years.
- Mortgage loans are of​ two types: Fixed Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM) .​
Individuals can choose between the​ two depending upon their requirements,​ and the​ capability to​ repay loans.
- FRM has a​ fixed rate of​ interest,​ and a​ fixed amount of​ monthly payments towards the​ loan amount .​
The term of​ FRM can be for 10,​ 15,​ 20 or​ 30 years .​
However,​ some lenders have recently introduced terms of​ 40 and 50 years.
- ARM interest rate is​ fixed for a​ period of​ time (generally 15 and 30 years),​ after which it​ is​ adjusted according to​ the​ market index .​
ARM interest rates are adjusted periodically on​ a​ monthly or​ yearly basis .​
The initial rate of​ interest in​ ARM is​ levied in​ the​ range of​ 0.5% to​ 2%.
- Lenders sanction an​ ARM loan depending upon a​ borrower’s credit report and credit score .​
They prefer to​ approve loan to​ borrowers with high credit scores,​ because low credit scores indicate greater risk of​ money to​ lenders .​
In order to​ compensate for this increased risk,​ lenders levy a​ high rate of​ interest on​ loans approved for less creditworthy borrowers.
- ARM loans prove useful to​ borrowers who own a​ lot of​ equity on​ their home .​
ARM loans relieve a​ borrower from heavy monthly payments,​ and provide them the​ flexibility to​ choose the​ kind of​ payment to​ make every month .​
These loans have a​ fixed amount of​ minimum payment to​ be made every year for 5 consecutive years.
Prospective borrowers should gauge their options carefully before choosing a​ loan .​
a​ well-calculated move can save a​ great amount of​ money over the​ term of​ the​ loan.




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