Unlocking the Benefits of a Home Loan: What You Need to Know
Perhaps the largest financial investment of a lifetime is the purchase of a home. Many people take out a loan to do so, and hope to enjoy the benefits of that loan. Every loan comes with its own unique requirements and terms, but understanding the basics of a home loan can help you make the most of it. This guide will provide an overview of what you need to know about home loans.
Know the Different Types of Home Loans
One of the first steps to unlocking the benefits of a home loan is to understand the different types of loans available. Generally, mortgages can be broken down into two categories: fixed-rate or adjustable-rate. As the name suggests, fixed-rate loans come with an unchanging rate that stays the same throughout the life of the loan. Adjustable-rate mortgages (ARMs) are the opposite, as they have a rate that adjusts every few years. ARMs often have lower interest rates initially, but can end up costing more in the long run if the market rate rises.
Another factor to consider is the term of the loan; in other words, how long will you be paying it off? Most loans come in 15-year or 30-year terms, although there are shorter and longer loans available. The shorter the term, the lower the monthly payments—but you will need to put more money down and the loan amount is typically higher.
Understand Costs & Fees
Second to knowing the types of home loans, you should understand the costs and fees associated with them. Mortgage brokers, lenders, and banks charge an origination fee to cover the loan’s administrative costs. This typically amounts to 1-2 percent of the loan amount. Other common fees you may encounter include discount points, appraisal fees, title insurance, and closing costs, which can range from 2-5 percent.
In addition, you’ll need to pay for private mortgage insurance (PMI) if you don’t put enough of a down payment on the home. PMI typically amounts to 1 percent of your loan balance annually and is usually required for loans with a down payment of less than 20 percent.
Shop Around for the Best Loan Option
Since there is no one-size-fits-all solution for home loans, it’s important to shop around for the best option for you. Talk to multiple lenders and brokers and compare the rates, fees, and terms. Many online lenders offer pre-approvals that can help you get an idea of the loan amount you may qualify for. Remember to look for any hidden fees or large balloon payments that may be included in the loan.
Find the Right Property
Another key factor in unlocking the benefits of a home loan is to find the right property. Before you start your search, consider your future plans for the home. Are you looking for a starter home you will soon move out of or a forever home? Answering this question can narrow your property search. Your loan amount will also influence your property search, so make sure you have a realistic idea of what you can afford. According to Bankrate, you should aim to get a loan that won’t exceed 28 percent of your monthly income.
The Bottom Line
A home loan can open the door to many benefits, from owning your own property to growing your asset base. However, to secure the right loan that meets your needs, you must understand how they work. By knowing the types of loan, estimating all the fees and costs associated with them, shopping around for the best option, and finding the right property to buy, you will be well on your way to unlocking the advantages of a home loan.
