Choosing Between Home Loans And Mortgages
Friday, November 17, 2006
Home loans and mortgages are asset-acquiring facilities that
relieve an individual from making immediate lump sum payments.
A home equity loan creates a debt against the borrower's house.
According to this loan, the borrower has equity in his or her
home as collateral. 'Collateral', here, refers to assets or
properties that create a debt obligation. In real estate, the
borrower's equity in an asset refers to the difference between
the market price of a property, and the borrower's home equity
loan. Equity is the interest that a borrower pays on the loan.
A mortgage, on the other hand, is a process of using property
as security for debt repayment. It is a legal device used for
securing an asset. By arranging for mortgage, a borrower can
acquire residential or commercial real estate, without the need
to pay the full price right away.
Choosing between Home Loans and Mortgages:
- Most home loans require the borrower to have a very good
credit history. Hence, individuals with an average credit
history are likely to be denied this loan.
- 'Closed-end Home Equity Loan' levies a fixed rate of interest
for a period of up to 15 years. The borrower receives a lump sum
amount at the time of settlement, in the final steps of a
transaction. No further loan can be given to the borrower once
the final settlement of a real estate transaction is executed.
The maximum amount of money that can be given as loan to the
borrower depends upon his/her income, credit history and
appraised value of collateral, and other finance related
information.
- 'Open-end Home Equity Loan' is a revolving credit loan that
generally levies a variable rate of interest. The borrower can
decide when and how frequently to borrow money against the
equity. This again is determined on the borrower's good credit
history, consistent income and other such criteria. This loan
is available for a period of up to 30 years.
- Mortgage loans are of two types: Fixed Rate Mortgage (FRM)
and Adjustable Rate Mortgage (ARM). Individuals can choose
between the two depending upon their requirements, and the
capability to repay loans.
- FRM has a fixed rate of interest, and a fixed amount of
monthly payments towards the loan amount. The term of FRM can
be for 10, 15, 20 or 30 years. However, some lenders have
recently introduced terms of 40 and 50 years.
- ARM interest rate is fixed for a period of time (generally 15
and 30 years), after which it is adjusted according to the
market index. ARM interest rates are adjusted periodically on a
monthly or yearly basis. The initial rate of interest in ARM is
levied in the range of 0.5% to 2%.
- Lenders sanction an ARM loan depending upon a borrower's
credit report and credit score. They prefer to approve loan to
borrowers with high credit scores, because low credit scores
indicate greater risk of money to lenders. In order to
compensate for this increased risk, lenders levy a high rate of
interest on loans approved for less creditworthy borrowers.
- ARM loans prove useful to borrowers who own a lot of equity
on their home. ARM loans relieve a borrower from heavy monthly
payments, and provide them the flexibility to choose the kind
of payment to make every month. These loans have a fixed amount
of minimum payment to be made every year for 5 consecutive
years.
Prospective borrowers should gauge their options carefully
before choosing a loan. A well-calculated move can save a great
amount of money over the term of the loan.
About The Author: Joe Kenny writes for the UK personal finance
sites http://www.ukpersonalloanstore.co.uk and also
http://www.cardguide.co.uk
posted by Dennis Cheesman @ 2:51 PM,
