Buying a home is a big financial commitment, and taking out a mortgage can be a stressful process. Understanding what kind of home loan is right for you prepares you to talk with lenders, and can help you get a better deal overall. This article will cover the basics of mortgage loans and their different types, including conventional, government-insured and VA mortgages.
What is a home loan?
A home loan (also known as a mortgage) is a sum of money that you borrow from a lender to buy a house. You agree to repay the loan, including interest, over a set period of time, called the term. You typically need to provide your lender with a down payment and have a stable income to qualify for a mortgage.
Your monthly payments reduce the principal of your loan over time, which is a process called amortization. In addition, a portion of each payment is used to pay property taxes and homeowners insurance, which are escrowed in an account and paid on your behalf when due. There are many different types of home loans available, from conventional mortgages to government-backed mortgages such as FHA and USDA.
Types of home loans
A mortgage is a loan used to buy a home, and it gives lenders the right to repossess the property if you fail to repay what you borrow plus interest. It’s one of the largest loans you will take out in your lifetime, so it’s important to choose the right type for your situation.
Conventional mortgages are available with various term lengths and interest rates, including fixed-rate options. There are also government-insured mortgages, such as FHA, VA and USDA loans, that provide more flexible qualifications than conventional ones for specific populations like first-time homebuyers or borrowers in rural areas. Another option is a second mortgage, such as a home equity loan or HELOC, which uses your home’s equity as collateral. These are often more affordable for borrowers than a new mortgage.
Down payment requirements
The amount of money you have available for upfront home costs is one factor that determines the type of loan you can get. Many lenders require a minimum down payment of 20 percent, but there are loan programs that allow buyers to make a lower down payment. If you choose to make a smaller down payment, you’ll typically pay mortgage insurance (private mortgage insurance) that’s added to your monthly mortgage payment.
Conventional mortgages offered by Chase, for example, have down payment requirements as low as 3%, provided you meet income limits. However, the more you can put down upfront, the lower your loan amount and the less interest you’ll have to pay over time. Before choosing a down payment level, discuss your options with multiple lenders.
Interest rates
Mortgage rates can have a big impact on homebuying and homeownership. They influence how much home buyers need to borrow, which lenders offer and whether it’s a good time to buy or refinance.
Most people don’t have enough money to purchase a property outright, so they need a home loan. These loans are generally funded either by the banking sector (through short-term deposits) or by the capital markets through a process called securitization.
When comparing mortgage rates, be sure to look at the annual percentage rate (APR), which includes both the interest rate and any lender fees. This gives you a more complete picture of the cost of borrowing. You can also compare the APR of several lenders to find the best deal on a home loan.
Mortgage calculators
A mortgage calculator is a useful tool for homebuyers because it can help them estimate their monthly house payments. These calculations are based on the loan amount, the property’s purchase price and current interest rates. Other factors, such as recurring costs like property taxes, homeowners’ insurance and association dues, are also taken into account. Typically, lenders don’t want these expenses to exceed 40 percent of an individual’s pretax income.
Many calculators can also be used to compare various mortgage loan terms, such as fixed-rate versus adjustable-rate mortgages. Some even include tax savings estimations and amortization schedules. Finally, borrowers can use these tools to determine if they can reduce their mortgage payoff timeline by making extra payments. Borrowers may do this for a variety of reasons, such as saving on interest costs or being able to sell their home sooner.