Home loans have many different names, and there are many different products available when it comes to home financing. With so many products available to access for home loans, people can often become confused regarding the different options available to them.
With the number of financing options available, it can be difficult to judge which product will best facilitate your overall financial plan and abilities. A great way to start is to familiarize yourself with the types of financing available and understand what they are used for.
Whether you are looking to purchase your first home or refinance your current mortgage, there are many reasons why home loans are a solid part of your financial planning. Here’s a quick crash course in home financing that can help clarify things and make the financial planning process for your family run smoothly.
Purchase Financing
Purchase financing is used for first-time homeowners, generally utilized with a down payment, which allows home buyers to break out of the rental cycle and be full-fledged owners of their own homes.
Also known as mortgage financing, first-time homeowners will generally put down 25% of the purchase price of the new home they are looking to buy, and finance the rest through the bank.
Purchase financing allows families to own their homes, jointly, with the bank on title as the financier. Mortgage financing consists of an amortization period and a term period.
The term can be open or closed, and what that means is you can lock in a great interest rate for a certain amount of time, ensuring that you will have the same monthly payments for the next few years. This means you can settle your financial plan in place and set a 3 or 5-year plan for your financial goals.
Open mortgage terms mean you can pay out the loan at any time, however, open pans will normally have higher interest rates. Open loans are good options for house flippers, or those thinking they will be upgrading or moving shortly.
While the rate may be higher, you can avoid expensive penalties for paying out a closed mortgage in this manner. It is always a good idea to get more information on what products are available to you, especially if you are only looking at financing for the short term. No matter what your financial plans are, you can find a mortgage product that suits your finances and lifestyle.
Refinancing
Mortgage refinancing is done once the set term on your mortgage is due for renewal. You can normally decide to keep similar terms on your mortgage, and your financing company will provide you with renewal options.
However, if you have had changes in your financial plans or status, you can choose to refinance your mortgage rather than simply renew it. There are many reasons people refinance their mortgages, however, the two most common are refinancing for a better rate, or refinancing to clear off some debts.
Refinancing for a Better Interest Rate
Refinancing your mortgage for a better rate is often done when your credit has improved from the time you signed your original mortgage term. It is quite possible to drop your interest rate, especially if your credit was not the best when you originally purchased your home.
Refinancing for rates involves contacting differing financial institutions or a mortgage broker, to see if you qualify for better interest rates from different institutions. Once you have seen all the options available to you, you can choose to renew your current mortgage with similar terms with your current provider, or you can choose to refinance the mortgage with a different institution with a lower rate and lower monthly payments.
Refinancing for Debt Consolidation
Refinancing your mortgage for Debt Consolidation means adding a portion of your debt onto your mortgage, or absorbing all of your debt and lumping it together at a lower interest rate, with the mortgage secured to your home.
While refinancing your mortgage for debt consolidation will generally raise your monthly payments, as you are accessing the equity in your home, it can lower your overall interest and monthly payments when considered against your current monthly output.
This is a good option to lower your monthly debt payments and lock in a great interest rate for your outstanding debts. This leaves less money going to credit payments and more money available for you and your family.
Debt consolidation via mortgage refinancing is a very common way to reduce your debt load and reduce your monthly payments and interest rates, freeing up monthly amounts for your family.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a product available to allow you to access the equity in your home for emergency repairs or home renovations.
Home Equity Lines of Credit (HELOC) are often used by long-time homeowners who have built equity in their homes and want to be able to freely access it, for any number of reasons.
HELOCs allow homeowners to access their equity, via a line of credit that is secured with the equity in the home.
HELOCs are great options for stable homeowners who have paid down a large chunk of equity from their mortgages. HELOCs allow owners to access funds for repairs and renovations on their homes, especially older ones that need a bit of work.
HELOCs have lower monthly payments, however, the payments are normally interest-only, so to pay off the balances it is important to make payments larger than the minimum when available.
No matter what your financial plan is, several Home Loans are available. Each type of home loan is geared towards different financial plans and scenarios, So it is important to get all the information you need and put a plan and product in place that allows you to reach your financial goals every month.
Home Loans are a great way to get you into a prime financial position, as long as they are used properly, and you choose the right one that fits your plan and financial abilities.