Linda Turnbull asked:


What Exactly Is a Home Loan?

It is an often asked question, especially to those who are new homeowners or are prospective candidates to be so. The answer can be fairly complicated, but to be as succinct as possible, a home loan is essentially the money acquired after the placing of one’s house as collateral or security in order to protect the debt. Home loans are often correlated with mortgages which are defined as a “lien” on one’s house and usually concern two entities, the lender and the borrower.

Its Purposes

The purpose of a home loan and mortgage is to ensure that the borrower repays the money loaned in purchasing a house. These payments are completed to the lender in intervals and installments. Still, it is not as linear or simple as that. There are a multitude of different and distinct mortgages that must be paid with each home loan, their discrepancies being very relevant to financial status and condition of the borrower. Failure to take note of this can result in failure of repayment, which can have unfortunate consequences including foreclosure.

Different Aspects

There exists a myriad of different mortgages that can come with a home loan. Still, the two most orthodox and well regarded lay in fixed-rate mortgages and adjustable rate mortgages. The first is probably the most widely used as it contains the key strongpoint of resisting change as interest is altered. If the interest rate were to rise, a borrower’s mortgage would remain unaffected under this form. Unfortunately, the mortgage acquired by this home loan can not only gain from this attribute, but also suffer from it. If the mortgage rate were to lessen, for example, it becomes much more difficult to acquire a lower payment as opposed to a different form of home mortgage.

Conversely, the adjustable rate mortgage paid with a home loan can fluctuate and is wholly dependent upon the interest rate. In this case, the mortgage acquired with these home loans work somewhat inversely with that of fixed-rate mortgages. One can recompense in the case of a lower interest rate, however, they can also lose in case of that of a higher interest rate. Adjustable rate mortgages also exist under a fixed-rate system, though only to a certain extent. Often a fixed-rate is paid for a certain interval of time, but the rate loses its jurisdiction after that time period is ended. At this point, the mortgage payment is left to the permutations in the interest rate.

Possible Consequences

If a borrower fails to repay a lender the promised mortgage, foreclosure may become imminent. This is the unfortunate and very significant risk that comes with a home loan and home ownership. For this reason, it becomes essential that a buyer weighs their financial options before purchasing a house. Like any other loan, home loans carry some form of contingency and their collateral may be seized upon if payment is not acquirable.



ADAM

Dean Shainin asked:


When you’re choosing a home loan, there are two big decisions you need to make, namely whether to take a fixed interest rate or an adjustable interest rate mortgage.

It is important for you to be aware of what these different type of home loan interest rates encompass and also know which one would be suitable to your needs and circumstances.

Fixed-Rate Mortgage

1. A fixed-rate mortgage is a mortgage with an interest rate that is fixed for the life of the loan and the debt is amortized, or paid in equal monthly installments for the entire amortization period, be it 30 years, 15 years, or 20 years.

2. What are the advantages for a fixed-rate mortgage? The main advantage is that you know precisely how much each repayment will be over the long term. Even if market interest rate rise, you can lock in lower rates.

3. This type of a loan is suitable for someone in not keen on movements in home loan interest rates, and who does not want to constantly review the performance of market interest rates.

4. A fixed-rate mortgage is also suitable for people with a fixed income, for those who do not want ‘surprises’ in the form of sudden changes in their monthly repayments. With this type of a loan, you have certainty that as the years go by, your payment will remain the same, and you will pay exactly the same amount until you finish paying your mortgage. If you are the sort of person who does not like uncertainty as far as future interest rate increases are concerned, then this is your loan.

Adjustable Rate Mortgage

1. An adjustable-rate mortgage (ARM) is one where lenders lift or lower the interest rate as interest rates in the wider market change, meaning that your repayments may go up or down. The home loan interest rates are adjusted periodically to keep it in line with changing market rates.

2. What are the advantages for an ARM? This type of a loan has a lower start interest rate, and it is relatively easy to qualify. In addition, one can also be able to predict the direction of the rates in advance, but not always. From the lenders or bankers point of view, this loan type is better because the loan stays close to their cost of funds, thus enabling them to match their assets to their liabilities.

3. A mortgage with an adjustable rate is suitable for people who are good planners and who have alternative sources of funds or disposable assets. In order to manage an adjustable-rate mortgage properly, one need very good cash-flow management skill. This loan would also be good if you anticipate windfall profits that will allow you to reduce the principle substantially, thereby lowering your monthly debt. The preliminary payments for this type of a home loan tend to lower, as lenders offer lower initial rates to attract potential home buyers into the deal.

4. With an ARM, you can qualify for a higher loan amount. So if you expect some career advancements and subsequent salary increase, then this type of a mortgage rate will be suitable for you. If the interest rates decline, your repayments are lowered, and this may be a good ‘bonus’ to get. With good planning, that “bonus” should let you to handle the increases in home loan interest rates comfortably, or to add to your payment amount to reduce the principle balance of your loan.

It is important that you are fully aware of what these different types of mortgage interest rate imply, the advantages and disadvantages involved; so that you can decide which one is the best for you.



ALTON