When it comes to prioritizing your personal finances, the biggest piece of the pie is often your house. That’s why it’s so important to compare rates before you take out a new mortgage, refinance an old one, or acquire a home equity loan or a reverse mortgage. You’re not alone in the process. We can help guide you through the home loan marketplace. Choose one of our partners above to get started.
Finding the right home loan product is easier once you understand your options. Read on to explore top home financing and refinancing products.
A home loan, or a mortgage, is an agreement you enter with a creditor to receive money to purchase a house. Mortgages come in different shapes and sizes but at the end of the day its money to buy a house.
While paying back the loan, the creditor technically owns the property, but it is yours to use, assuming you make your payments on time. Typically, you need to pay a down payment (around 10 to 20 percent of the value of the property) upfront.
Here are some important points to consider as you browse your options:
Choosing the right home loan is a very important decision, as it will directly affect many aspects of your life. However, even if you picked the wrong home loan the first time around, there are ways to remedy the situation. Mortgage refinancing is one such option.
Mortgage refinancing is used to lower the interest rate of a home loan. It involves replacing your current loan with a new one, and it may result in a lower monthly payment, canceled insurance premiums, and a different amount of time left on the loan.
It makes sense that a product like this would exist since your finances are bound to change over time. Half-way into a 30-year fixed-rate loan, many borrowers find themselves in a different financial position than when they started.
Before you refinance your home loan, review three kinds of refinancing products:
One reason borrowers hesitate to refinance their loans is that they are worried about paying closing costs all over again. Some creditors make this easier by adding those costs to the loan. The downside is that the closing costs will end up costing you more, as they will become part of your loan, which is paid back with interest.
Equity is the difference between what you owe on a loan and the value of the item you used the loan to purchase. When you have positive home equity, the amount you owe on your mortgage is less than the fair market value of your house.
With a home equity loan, you borrow from your home equity, or the difference between the value of your home and how much you have left on your mortgage. You will not be able to borrow all of it. Creditors will usually require you to have at least an 80 percent loan-to-value ratio, which means you cannot borrow to the point where you owe more than 80 percent of the value of your house.
For instance, if the fair market value of your house is $500,000, then your loan-to-value ratio could not be over 80 percent of that, or $400,000 ($500,000 x 0.8). If you had $350,000 left on your loan, that means you might be able to borrow up to $50,000 before reaching the 80 percent loan-to-value ratio.
A home equity line of credit (HELOC) is similar to a home equity loan, except instead of receiving the money all at once at the beginning, it is used more like a credit card, where you can borrow up to the agreed upon amount when you need it.
You use your home as collateral for both a home equity loan and a home equity line of credit. That means if you cannot pay what you owe, you risk losing your house.
If you do not want to use your home as collateral, another option might be an unsecured personal loan. Your personal loan agreement should not include any language about losing your house if you cannot pay back the loan.
Some of the reasons people choose a personal loan instead of a home equity loan include having a fixed interest rate, a shorter loan term, and a faster application and borrowing process. Negatives for using a personal loan include higher interest rates, larger monthly payments, and not being able to claim a tax deduction on the interest.
A reverse mortgage is very similar to a home equity loan, except that it is only for those who are at least 62 years old. It can be used to supplement one’s retirement income, offering either a line of credit or a fixed monthly payment to be paid back when the borrower moves away, sells the home, or passes away.
Those who use a reverse mortgage will see their debt increase as their home equity decreases. When the time comes for the creditor to collect the debt, the home will be sold (or, if the heirs choose to, there may be an option for them to pay off the mortgage and keep the house). If there is leftover equity after the debt has been settled (including all associated fees), that money will go to the heirs.
The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and offered by private banks. The limit on how much you can borrow with an HECM is $625,000.
Other types of reverse mortgages include the single-purpose and proprietary reverse mortgages. The single-purpose option has limitations on what items for which you can use the money, and the product is especially for homeowners with lower incomes. Proprietary reverse mortgages tend to be more expensive than other options, but they are less limited regarding what you can do with the money and how large the loan or credit can be.
The first step toward choosing home loan product is to compare your options. Get started right now by browsing the trusted companies featured at the top of this page.
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