Thursday May 25, 2017

Home Loan Basics

Thinking of buying a home?  Then you’re going to need a mortgage, unless you’ve got a lot of cash on hand (in which case, everything is a whole lot simpler).

Assuming you’re most people though, you probably don’t have but a small percentage of the money you need to purchase a house in full.

You’ll be asked to put that percentage down as an initial down payment, and then you’ll need to take out a mortgage to pay for the rest.

When people say they are going to “buy a home,” they really mean they are going to do the equivalent of borrowing one until they’ve paid for it in full.  Their name is on the lease as the owner, but the home can be repossessed if they fail to pay their mortgage on time and in full.

A lot of the people who “bought” homes decades ago are now losing them in foreclosures because they can no longer afford to pay off their mortgages and never fully owned what they purchased.

A mortgage is also known as a home loan.  It’s money you borrow to pay for the use of the home.  At this point you “own” the home and live in it, but the home is collateral for your home loan.

That’s why in a sense you’re really just borrowing the home.  You get to live in the home, but you have to pay off the mortgage in full before it stops functioning as collateral.

You can’t borrow tens or hundreds of thousands of dollars without paying another price, which is the interest on your home loan.  This is expressed as an annual percentage.

There may be other fees involved too, but interest is typically the highest one.  Some interest rates are fixed, while others are adjustable.  With adjustable interest rates, you have to watch out—often these start really low but then balloon over the years until they are utterly unaffordable.  This again, has landed many homeowners in foreclosure situations.

It is typically in your best interest (literally) to get a shorter term mortgage if you plan to stay in your house a long time, because the interest you owe will be substantially less.  The interest on a 30 year loan is typically twice the interest on a 15 year loan for example.

Your monthly payments will of course be higher on a shorter term loan.  This means though if you’re only planning to stay in the house a few years, you may as well go with a longer term loan so you can save money before selling the house again.

As you can see, there’s a lot to consider before you decide to purchase a home—and these are just the basics!  You’ll need to do a lot of homework before you make up your mind.  Remember there is no one “best” plan for everyone—it all depends on your personal needs.

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