- Home Loan Definition
A home loan is a type of mortgage that provides funds for purchasing a house or property. A home loan is different than a personal loan because it is secured by real estate, whereas a personal loan is not. A home loan is often referred to as a mortgage because it is similar to a traditional mortgage. However, unlike a traditional mortgage, a home loan does not require repayment until the borrower sells their home or refinances the loan.
- Types of Home Loans
There are two types of home loans: fixed-rate and adjustable rate. Fixed-rate mortgages have a set interest rate throughout the entire term of the loan. Adjustable rate mortgages (ARMs) have an initial low interest rate, followed by periodic adjustments based on changes in the prime lending rate. ARMs may offer lower monthly payments at first, but they tend to cost borrowers more in the long run because the interest rates change over time.
- Interest Rate
The interest rate is the amount of money lenders charge for borrowing money. The higher the interest rate, the greater the risk of losing money if you do not pay back the loan. Lenders use the interest rate to determine how much they will lend you. If you borrow $100,000 at 5% interest, you will owe $500 per month. If you borrow the same amount at 10%, you will owe $1,000 per month.
- Down Payment
Down payment refers to the portion of the purchase price paid in cash or equity securities. When buying a home, the down payment is the minimum percentage of the total purchase price that must be paid in cash or equity security. You cannot buy a home without putting some money down. Most people put 20% down on a home.
- Closing Costs
Closing costs refer to fees charged by the lender at the end of the transaction. These fees cover things like title insurance, recording documents, and processing paperwork. Closing costs vary depending on where you live and what kind of loan you take out. In general, closing costs range between 1% and 4%.
- Mortgage Insurance
Mortgage insurance is a policy that protects the lender in case the borrower defaults on the loan. Mortgages are insured by private companies called mortgage insurers. Mortgage insurance is optional, but it is recommended that you get it if you have less than 20% down payment.
- Prepayment Privilege
Prepayment privilege is the right to prepay your mortgage early. This means that you can make extra principal payments before the due date. By paying off your mortgage early, you save money on interest charges.