A Simple Guide To Understanding The Range Of Home Loans Available To Consumers

One of the most important things anyone shopping around for a home loan can do is educate themselves about them. Education empowers you, pure and simple, and it really doesn’t take a lot of time or effort to learn about home lending. You just need the motivation to do it. When you understand the range of home financing loans available along the basic advantages and disadvantages of each one, you’re far more likely to secure a deal with lender which saves your tens of thousands of dollars over the long run and helps with foreclosure prevention. The statistics prove it.

In this easy step-by-step guide we’ll be looking at your mortgage loan options including first mortgages, second mortgages, refinance loans, home equity loans (HEL) and home equity lines of credit (HELOC) along with bad credit loans and credit card consolidation loans. Understanding your own financial situation and the loan options available to you in this current economic climate will pay off huge dividends when it comes to the application process so if you’re smart you’ll pay attention!

You’ll obviously want to find a home loan which fits your needs and one you can manage over the long term so let’s concentrate on step one…

Which Home Loan Is Best For Me?

Don’t worry, this isn’t going to be “heavy duty” reading, I’ll break things down into a strictly need to know basis about property loans. This will ensure you get an honest picture of the over all home lending landscape what what’s available with mortgage products. We must not forget as well that your credit score will have a big impact upon the terms your loan will carry and don’t neglect to include mortgage insurance into your calculations.

A First Mortgage: This is the default kind of home buying loan everyone thinks about and is mostly used to buy a house to live in or real estate in general. With a property loan something called a lien is placed on the house which secures the loan for the lender. First mortgages offer the greatest amount of flexibility and are offered with either fixed interest rates or variable interest rates. In order to support growth in the real estate sector the government will also offer grants and incentives to people such as first-time buyers (first-time home buyers discount). In ‘the good old days’ lenders were offering the maximum amount of assistance to first-time buyers through 100% mortgages (meaning you didn’t have to have an initial deposit or down payment) and other fee’s were also waived such as closing costs. Buyers present their financial information to a lender and get pre-approved for home loans so they can shop for houses confident that they’re within their price range.

Home Refinancing Loans – Refinance loans are very flexible and there are many different situations where the make the most sense. Basically your original loan is replaced by a refinance loan in order to do things like lowering your mortgage interest rate or to release equity currently trapped in your property. A refinance loan is typically larger that the first mortgage you already have. The same kind of terms and repayments apply to refinance loans as first mortgages. See also ‘reverse mortgage loans’ and ‘refinance rates’.

Second Mortgages – This is really a category of loans, for example, home equity loans and refinance loans will often be grouped or referred to as coming under the term of second mortgages. Should you have a first mortgage on your home and some kind of a second mortgage then the first lender will have the rights to foreclose upon your home should you default on your repayments. What this means is that lenders carry a higher risk when issuing second mortgage loan products and for this reason they often carry higher interest rates.

When you take a refinance loan you’re simply increasing the amount you owe on your home in return for the cash while a second mortgage is a new loan entirely and may even be with another lender.

Home Equity Loans (HEL) – Boy are these in fashion among homeowners. Equity loans come into play after you’ve been paying back your mortgage for a few years. Should the value of your house go up as the result of the property market trending upwards for example then you’ll have increased wealth trapped in your home especially if you’ve also been diligently paying your mortgage back - lowering the amount the bank owns of your house. Home equity loans allow you to access the extra equity in your house without having to sell your house. They are easier and faster to get approved for than first mortgages and also carry tax advantages in that your interest repayments are often tax deductible.

You can use HELs for a number of different things including college loans (college finance) and home improvement loans, even things like auto loans or boat loans can be arranged through home equity loans. They come in both fixed and variable rates with terms of anywhere between 5 – 30 years and are very popular among retired people with not enough savings.

Home Equity Lines Of Credit (HELOC) – These types of home loans operate in the same way as traditional credit cards do but the amounts available for you to use are far larger. With a line of credit you don’t receive a lump sum all at once but rather you are approved to borrow a set amount and are free to withdraw up to that limit as you wish. Also, you only pay interest on the amount you’ve actually taken out and not the entire amount you’ve been approved for. They are great for business circumstances when you are unsure of how much you’ll need to borrow and when you’ll need access to the cash.

A home equity line of credit carry terms of 10 to 25 years and come with both variable and fixed interest rates. You can also have principal only repayments and interest rates based upon the unused portion.

Standard Fixed Rate Home Loans – These are very simple and straight forward. You agree to pay a fixed rate of interest for the entire duration of the loan. This offers you protection against possible rises in future interest rates but the rate will also initially higher that a variable rate loan.

Variable Rate Home Loans – You’ll also hear these kinds of loans referred to as an adjustable rate loan or ARM (adjustable rate mortgage). As the name suggests the interest repayments will fluctuate over the term of the loan as the global markets, stock markets, debt securities mortgage markets, inflation, mortgage bonds and other external factors weigh in with their influence. The interest rate is bench marked to something known as the Prime rate (LIBOR rate). It can be adjusted as often as every day to as infrequently as every year. In the background there is a lot of activity happening with mortgage giants Fannie Mae and Freddie Mac along with many other factors which cannot be predicted. The golden rule is to compare rates and shop around different home loan experts and mortgage agencies.

Bad Credit Loans – If you have a bad credit history then many of the mainstream loans and lending options may be denied to you as lenders perceive you as high risk. You can expect that any bad credit loan will carry a higher than normal interest rate and they’ll be approved for smaller equity shares in your home. The industry also refers to bad credit loans as sub prime loans (referring to the prime interest rate). If your credit score proves to be too prohibitive then you need to look into credit repair, it is possible.

Debt Consolidation Loans – Another very popular loan. If owe money to multiple lenders such as different credit cards, car loans, personal loans, boat loans etc but find that that the interest rates are too high or it’s too time consuming to keep track of all the repayments then you can use the equity in your home to secure a loan – pay back your creditors at once – then simply repay the new loan with one single monthly repayment to the one lender.

Debt consolidation loans can be a Godsend but only if you change your credit card spending habits and debt management after taking one. If you continue to spend unwisely with your credit cards you’ll only sink into even more debt and this time you won’t have any home equity left to bail you out.

Some good sites for researching home loans online include Quicken Loans, LendingTree and Bank of America. Using the mortgage calculators and reverse mortgage refinance calculators on their websites is a good way of collecting rough estimates of what kinds of terms and interest rates you could afford.