Geoffery Thornton asked:


We list below a brief explanation of each of the more common types of home loans available to home owners and home buyers. Before you go to one of the sites like wikianswers or Yahoo! Answers (and sorting through a dozen spam comments) give this page a quick look as most likely you’ll find your answers here.

Mortgages

There are a dozen different types of mortgages, but in the interest of simplicity, we’ll just explain the basic idea behind a mortgage which is that you take out a loan using the home you intend to buy as collateral against the loan. If you fail to make payments, the lender will ultimately have the right to your home and can foreclose or sell it. Mortgages do come with interest rates, like any other loan.

Subprime Lending

Subprime lending refers to a lender providing credit to borrowers who don’t yet meet prime underwriting guidelines. Subprime borrows have a higher perceived risk. This lending is applied to people with a history of delinquency or defaulting, those with bad credit, or those simply with limited debt experience (eg students).

Subprime lending was a common type of lending during the 2007 credit crunch. Now… according to the Wall Street Journal, 61 percent of all subprime borrowers actually do have the ability to take out a prime conventional loan. So it is wise to know your options before putting yourself at risk.

Home Equity Loan

A home equity loan is simply a loan wherein a borrower puts the equity of their house up as collateral. This is common as a means of paying for much needed home repairs, paying for hospital bills, or even financing the purchase of a new car. Equity loans are given in one lump payment generally with a fixed, as opposed to adjustable, interest rate.

It’s not advised that you take this route unless you absolutely need to, and can be absolutely certain that you can pay it off. That said, this can be an excellent way of turning your home into an investment for starting a new business or paying unforeseen expenses.

Home Equity Line of Credit

A Home Equity Line of Credit, or HELOC, is a different form of Home Equity Loan. Whereas a Home Equity Loan uses the home as collateral for a lump sum, the HELOC uses the home as collateral for a line of credit. The line of credit is offered for a “draw period”, which could be anywhere from five to twenty five years, and repayment will be of the amount drawn, plus interest, which may be adjustable. This type of loan has become popular in the US because it can be deducted from one’s taxes.

Refinancing

Refinancing is basically the trading of one debt for another. The benefit can be a lowered interest rate or smaller monthly payments. In recent years, this kind of debt-swapping has become popular thanks largely to the strife in the global economy, leaving home owners unable to meet the demands of a loan taken out before the UK and US recessions.



ROLAND

Marcus Masters asked:


The majority of families living in the modern world devote a significant portion of their monthly income to paying a mortgage.

It is possible to save money through refinancing your mortgage, sometimes over 5-figures a year (depending on the size of the mortgage), and below you will find the top three reasons why an individual or family chooses to refinance their home mortgage.

Before I get into the three reasons, let me first say that usually the primary motivation for refinancing a home mortgage is to secure a lower interest rate. The three reasons that I want to discuss go beyond simply trying to lower the interest rate, since it kind of goes without saying that everybody wants a lower interest rate.

The first reason that people choose to refinance is to reduce or eliminate the risk of an increasing interest rate by switching from an adjustable rate mortgage to a fixed rate mortgage.

Most people sign up for an adjustable rate when they are first getting their home loan because of the tempting lower introductory rate. What they fail to take into account at this time is that a few years down the road, their rate will have adjusted to a point where it is as high as 1-2% above the normal fixed rate.

When interest rates adjust, more times then not they adjust up and not down. This can be risky, especially if the adjustment period is short, and a good way to offset or eliminate this risk is refinance to a new mortgage with a fixed interest rate.

The second reason people tend to refinance their mortgage is to get a lump-sum of cash left over. They will work with a bank or a lender to pay off their existing mortgage, then take out a new mortgage that is greater than the value to be repaid on their home. That way they are left with a certain amount of money left over, whether it is $5,000 or $100,000. The term for this is ‘cash-out refinancing.’

Cash-out refinancing can be a good idea for funding something like a large home improvement or a new car. A poential downside is that it will usually be difficult to get the same low interest rate with cash-out refinancing as you would have gotten by simply refinancing the home and nothing more.

The third reason that most people will refinance their mortgage is to switch from a subprime loan to a prime loan. The entire premise behind the subprime lending market is to provide an option for the majority of potential borrowers who do not fit the stringent qualifications for the prime loan market.

A person who agrees to a subprime mortgage usually does so without regard to the high interest rate they will have to pay, and are only concerned with getting the money for their house as soon as possible.

By switching from a subprime mortgage to a prime mortgage, you will usually be able to save 1-4% on your interest rate, and the lender will be more willing to come to agreeable repayment terms because you will be so well-qualified.



KIRK