Whether you want to purchase a home as an investment or to reside, a home mortgage loan can help you navigating the financial side of the process involved. Explore your mortgage options and know how it works.
A home loan or a mortgage is a loan received from a mortgage company, financial institution or a commercial bank to purchase a home or real estate. To get home loans, you have to meet several requirements such as desired income level, high credit score and must have financial ability to repay the loan.
Getting a home loan is one of the most significant financial decisions, and therefore, you should know how it works, and the type of loan best fits your needs.
When you receive a loan and begin making a monthly mortgage payment, it gets divided into several different components like Principal, Interest, Taxes, and Insurance (PITI).
In the early years of the loan, interest makes up a greater part of the overall payment. But as time passes, you begin paying more principal until the mortgage is paid off. During the process, the lender provides an amortization schedule, which will show how much principal you are paying versus interest and how the loan balance drops over time.
Different types of mortgage exist. They are:
A fixed-rate loan is the most common type of conventional loan. This mortgage prescribes a monthly payment and single interest rate throughout the loan's life, which may typically last for 15 or 30 years. An example of a fixed-rate loan is a jumbo loan. This type of loan is best suited if you aren't going to shift to any other place anytime soon.
Adjustable-rate mortgages (ARM) provide interest rates lower than a fixed-rate mortgage for a short duration like five or ten years rather than a mortgage life. This type of loan is best suited if you have lower credit scores.
The U.S. Department of Veterans Affairs guarantees this type of mortgage. This mortgage is given if you are a veteran who have served 6 years in the reserves, 180 days during peacetime, or 90 days consecutively during wartime.
The Federal Housing Administration (FHA) backs the FHA loans. This type of home loan is an excellent option if you have minimum savings for a down payment. FHA offers fixed-rate loans, with either 15 or 30 years terms.
5. Bridge Loan
Also known as a repeat financing or gap loan, this type of mortgage is an excellent option if you are looking to buy a residence before selling the previous home. It is also best suited for if you have high credit scores, low debt-to-income ratio, and you don't need to finance more than 80% of the combined value of 2 homes'.
The U.S. Department of Agriculture guarantees this type of mortgage. It is an excellent option if you are struggling financially in rural areas.
A mortgage is a good option if you want to save taxes and ensure sufficient liquidity. It also helps in capital appreciation while giving a sense of accomplishment.