Buying a home is one of the biggest purchases a person will make in their lifetime. It is also one of the largest debts a person will incur. Home loans are another type of loan that is really common, like an auto loan. However, because a home loan is such a large investment lenders are very serious about who qualifies and who does not.
You have to be very smart when getting a home loan, too. There are many aspects that you should consider and make sure you understand. It is important that you take the whole process of getting a home loan seriously.
Types Of Home Loans
Home loans are not just for the purpose of buying a home. There are actually three types of home loans. As the name suggests, each type of home loan does involve some aspect of the home and the collateral for each type is the home. The following explains about each of the three types of home loans.
- Home equity
A mortgage is the type of home loan used to actually purchase a home. The home is the collateral for the loan. A person will borrow the money needed to buy the home from the lender. Then the person must make monthly payments to the lender to satisfy the debt. Once the loan is completely paid the person will own the home.
A home equity loan is a loan taken on the equity in a home. Equity is the amount of money that represents the difference between the actual value of the home and the amount still owed on the mortgage. For example, your home is valued at $200,000, but you only owe $150,000 on your mortgage. In this situation you would have $50,000 in equity in your home.
One of the reasons that home loans are so appealing to lenders is due to the equity that is built. Equity is valuable and lenders will let you get a home equity loan so that you may use the equity in your home. In reality the equity is what you own and is yours to use. However, the only way to use it is through a loan, since the only other option would be selling your home. Lenders offer home equity loans so you can use the equity and still keep your home.
A home equity loan is often called a second mortgage because it is second behind the mortgage. A lender is more at risk for losing money on a second mortgage because in the case of default the lender can not simply move to foreclosure because they do not have the first rights to the property. However, the lender may buy the first mortgage and then proceed with foreclosure.
Refinancing is basically getting a new loan. When you refinance you are paying off the old loan and getting a new loan that will cost you less. Generally, refinancing is done to get a lower interest rate.
Options In Home Loans
There are many different options in home loans. Lenders work to try to bring you choice so that you can choose a home loan that is right for you. They understand that when a loan works for the borrower that it is a better investment and the risks are much lower.
Here are some of the options you have in a home loan:
- Fixed rate
- Adjustable rate
- Interest only
A fixed rate home loan is a loan that has an interest rate that never changes. The monthly payment is going to be the same for the whole length of the loan.
An adjustable rate home loan is a loan where they interest rate changes. It may change monthly or less frequently. You will not know what your monthly payment will be. It could be more or less each month. The changes are based upon the federal interest rate set by the federal government.
FHA stands for Federal Housing Administration. It is a division of the United States Department of Housing and Urban Development or HUD. FHA loans can be used to purchase a home or to get a home equity loan. An FHA loan is not really a loan. You get a loan through a lender and the FHA loan will back you up. Should you fail to pay the loan the FHA loan will pay the lender. FHA loans are perfect for the first time home buyer or for someone who may not ordinarily qualify for a home loan.
A VA home loan is a lot like an FHA loan, but it is available through the United States Department of Veteran Affairs. A VA loan is only available to veterans and qualifying relatives.
Interest only loans can be a true interest only loan where you pay only the interest on the loan until the final payment where you will have to pay off the balance of the loan. Most of the time an interest only loan allows a person to pay interest only for a short period of time and then resume normal payments. It is more of an option for a person who may be having problems making their monthly payment due to a temporary situation.
A balloon mortgage is somewhat like an interest only mortgage. Basically, with a balloon mortgage you will get small monthly payments, but at the end you must pay the balance. Failure to pay the balance in full when it is due will be considered defaulting on the loan.
Costs Of Home Loans
It is common for a person to not realize that there is more expense to a home loan then just the down payment and the monthly payment. There are actually quite a few costs associated with a home loan and they can really add up to a hefty amount. These costs are all going to be upfront. For someone who is not prepared, the various costs of a home loan could actually stop you from being able to get the loan simply because you can not afford it.
The following outlines all the costs you need to be aware of when getting a home loan:
- Down payment
- Closing Costs
- Prepaid costs
- Monthly payment
The down payment is the amount of money that you will put down on the home. It is a rather large payment and will go towards the actual cost of home. It is always smart to put as large of a down payment as possible up for the purchase.
The term closing costs is a wide term used to describe a range of costs associated with the loan process. Things like appraisal fees, credit report charges and other costs the lender must pay are included in closing costs. Some times the seller agrees to pay closing costs, which is a great deal, but if they do not then it is your responsibility.
Points are prepaid interest. Points are used to get a lower interest rate. In general, though, it is a needless cost that you will want to avoid. Sometimes if you are building a new home or buying a newly built home, the builder will offer to pay the points and in that case it is a good idea and money saver.
Prepaid costs include homeowners insurance and property taxes. Generally, when you get a home loan you will have an escrow account set up and you are required to deposit into that account 9 months of tax payments and 2 months of insurance payments. Additionally, you will usually be required to pay a full year of insurance up front. The escrow account is held by the lender, but can only be used to pay the insurance and taxes.
One of the costs you will likely be most concerned about is the monthly payment. You will have to work it into your budget and so it is no surprise you will be focused on it. It really needs no explanation, but the monthly payment is typically a combination of payment against the loan and interest.
With refinancing and a home equity home loan the costs may differ. Generally, though you will still pay most of the costs that you would with a mortgage home loan.
When you fail to make your monthly loan payment you are considered in default. Technically speaking the process of foreclosure starts the day you are late on a payment. However, lenders do not want to take your home. They know it is important to you and taking your home is not going to allow them to recover all the expenses of you defaulting.
The bank will typically first try to settle things with you before they attempt other collection methods or begin the foreclosure process. They are going to offer you a variety of options to help solve your situation. It is always best to be upfront with them on why you missed the payment. It is also smart to not just let things go because you will lose you home if you do nothing.
Foreclosure is the process the bank goes through to obtain your home and the right to sell it. Throughout the foreclosure process you will be given chances to fix what has went wrong. It is up to you to work with your lender quickly to solve the problem or you will no longer have your home.
The process of foreclosure involves these steps:
- Notice of Default
- Notice of Sale
- Trustee Sale
NOTICE OF DEFAULT
The Notice of Default is a document that the lender files with the County Recorders Office. It notifies the borrower that the lender is starting the foreclosure process and signals the beginning of the reinstatement period. During the reinstatement period, which will typically last up to the week before the trustee sale, is the period in which the borrower has the ability to bring the loan current and stop the foreclosure process.
NOTICE OF SALE
The Notice of Sale is usually issued three months after the Notice of Default with the County Recorders Office. The Notice of Sale sets the date for the trustee sale. The Notice of Sale is only issued if the loan has not been brought current by the borrower. This notice is also posted at the property and in the local newspaper to notify the public.
The trustee sale is the final step in the foreclosure process. It is a public auction to sell the home. The winning bidder must pay the complete bid price within 24 hours of the auction. The lender will set the opening bid for the property. If the opening bid is not met then the attorney on behalf of the lender will purchase the property.
As you can see a home loan is a complex loan. This type of loan is a long process that is not taken lightly by the lender or others involved. Understanding all the aspects of a home loan is very important because it is a major financial undertaking. The lender will usually be very happy to answer any questions that you may have and help you understand the process. In fact, lenders usually offer you as much information as possible because they know that the more informed a borrower is about the loan process that there is a better chance that they will not default. You should find that it is easy to learn all you need to know in complete detail about a home loan so that this is one of the smartest investments you will ever make.