Common Types of Mortgage and Home Equity Loans

Mortgage Rate Basics

One of the most important aspects of buying a house is the process of getting a mortgage loan.

What is a Mortgage?

A mortgage is a loan that you are required to repay over a stipulated time period. The payment period is usually decades so you need to ensure that you get the very best deal you can get. If you get a bad deal, you could find yourself with a very expensive loan that you’ll struggle to pay off.

Types of Mortgage Rates

It is important to understand the difference between a fixed rate and variable rate mortgage.

Fixed and Variable Rate Mortgages

With a fixed rate mortgage, the interest rate remains constant throughout the life of the loan and thus, your monthly payments will also remain the same. On the other hand, a variable rate mortgage will change based on the prevailing interest rates. The way it works is, the borrower will get a low interest rate for a specified period of time. The interest rate will then be adjusted annually according to current market conditions.

If you are a prospective home owner and current interst rates are low, it would be a good idea to get a fixed rate especially if you plan to remain in the home for a relatively long period of time. Conversely, if interest rates are relatively high and you’re not planning to stay in the home for a long time, you may be better off with a variable rate mortgage.

Locking in the Interest Rate

One of the most important things you can do is to lock down the interest rate no matter what type of mortgage you want to get. It is also important to do this as early as possible. This ensures that you’ll receive the same locked interest rate even if the current mortgage rate increases.

When you lock in the mortgage rate, it is important to get this in writing to ensure that there is no misunderstanding in future. If the lender is not willing to cement the agreement on paper, keep looking, You need to search around for a lender who would be willing to put the deal on paper.

Home Equity Loans

Home equity loans enable you to borrow against the equity that exists in your home. You can use these types of loans to borrow large amounts of money. Furthermore, they are easier to qualify for than other types of loans due to the fact that they are secured by your house.Home equity loans are divided into two main categories:

Fixed Rate Home Equity Loan

A fixed rate home equity loan is pretty much the same as a fixed rate mortgage loan. Because of the security that fixed rate home equity loans provide, these types of loans are generally the most popular loans for people that are looking to refinance their homes. They ensure consistent monthly payments without the worry of changing interest rates.

For example, your home equity loan is for a set amount, like $10,000.  You then pay-off the $10,000 at a fixed rate of monthly payments on principal and interest for the life of the loan which translates to a steady and consistent repayment schedule and potential tax advantages.

The loan term is generally from 5 to 15 years, and remains the same throughout your loan term. This is probably the best option for you if you are planning to own your home for several years or more, or need a certain amount for a specific expenditure, like a new roof.

The most popular loan proram are the 30-year, 20-year, 15-year and 10-year fixed rate home loans.

Home Equity Line Of Credit (known as HELOC)

With a HELOC, you don’t borrow a fixed amount but instead take cash advances or draws by writing checks or using an equity type debit card.  Your interest rate is usually variable and is tied to a bench mark interest rate.  Some banks may allow you to lock into a fixed interest rate under certain circumstances.  Your HELOC payment normally consist of interest only.

In essence, a home equity loan and a mortgage refinance with a cash-out are the same in one regard — they both allow you to end up with some cash.
 
If your refinanced cash-out mortgage has a higher interest rate than your original mortgage, then a home equity loan may be a better option.  This is because you will be paying the same new higher interest rate on the entire mortgage — not just the cash-out portion.
 
Whatever you may do, you must proceed with caution and educate yourself about the terms that mortgage lenders are offering.  It’s just too important not to do that.
HELOC terms can vary considerably between mortgage lenders and brokers.
 
For instance, some HELOC’s require you to take a minimum advance within a certain period of time.
 
This deadline can cause you to needlessly take a cash advance, just because the time period is coming to an end.
Lenders also have the right to “freeze” your HELOC account — not allowing you to write checks for any more advances.  They can do this if they think that your home has dropped in value.

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