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

Loan Modification Help Center asked:


Everyday we read about the worldwide financial crisis and, specifically, about the U.S. banking and housing crisis.  To understand the challenges facing borrowers during the Housing crisis, it is critical to understand adjustable rate mortgages – how they work and how they can impact you. 

ARMs offer both advantages and disadvantages. Unlike a fixed-rate mortgage, an ARM provides interest rates that change periodically – and payments that go up or down accordingly.  At first, lenders generally charge lower interest rates for ARMs and this makes an ARM easier to afford initially.  If interest rates remain steady or move lower, this can work to your long term advantage. It is important, however, to weigh the risk that if interest rates increase in the future, so will your monthly payments. 

The initial rate and payment on an ARM will remain in effect for a limited period–ranging from several months to 5 years or more. After this initial period, the interest rate and monthly payment may change at regular intervals – every month, every year, every 3 years.   This period between rate changes is called the adjustment period.

The interest rate on an ARM is determined by two things: the index and the margin. The index is usually a standard measure of interest rates and the margin is an extra amount that the lender adds. If the index rate goes up, so does your interest rate and monthly payment.  On the other hand, if the index rate goes down, your monthly payment may go down. Not all ARMs adjust downward, however so be sure to read the details about any loan you are considering. 

Lenders base ARM rates on a variety of indexes. You should ask what index will be used for your ARM, how it has fluctuated in the past, and where it is published.  

The margin may differ from one lender to another, but it is usually constant over the life of the loan. The fully indexed rate is equal to the margin plus the index. For example, if the lender uses an index that is currently 4% and adds a 3% margin, the fully indexed rate would be 7%.

Some lenders base the amount of the margin on your credit record – the better your credit, the lower the margin. In comparing ARMs, look at both the index and margin for each program.

An interest-rate cap places a limit on the amount your interest rate can increase. Interest caps come in two forms: A periodic adjustment cap, which limits the amount the interest rate can be adjusted up or down from one adjustment period to the next, and a lifetime cap, which limits the interest-rate increase over the life of the loan.  By law, virtually all ARMs must have a lifetime cap.

In addition to interest-rate caps, many ARMs limit, or cap, the amount your monthly payment may increase at each adjustment.  A payment cap can limit the increase to your monthly payments but also can add to the amount you owe on the loan. This is called negative amortization.

If you are considering an ARM, ask yourself: 

– Is my income enough–or likely to rise enough–to cover higher mortgage payments if interest rates go up? – Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future? – How long do I plan to own this home? If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time. – Do I plan to make any additional payments or pay the loan off early?

 

Golden Rule:  Before you consider any loan, ask questions and read the details. For information and news please visit Loan Modification Help Center



CORNELL