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Home Loans – A Basic Introduction
By: Joseph Kenny
The most popular method of financing a home purchase is with a mortgage. This is
a loan that is secured over the home.
There are a number of different mortgage suppliers and you will have to shop
around in order to get the best deal. Given that your home is probably the
single biggest purchase you will make in your lifetime, you must make sure to
take the care and attention that the transaction merits. Mortgage rates can vary
greatly from lender to lender and the amount your rate is set at can make a huge
difference to the amount your repayments will amount to. Even a small difference
in rates could save you thousands of dollars or allow you to have your home paid
off years sooner. So do your homework.
Fixed or Variable
When looking for the best loan, there are certain terms you will need to be
familiar with. For example, mortgages generally come as either a fixed rate
mortgage or a variable rate mortgage. The fixed rate loan will keep the same
interest rate and monthly repayment for the whole lifetime or term of the loan.
This will generally be for a period of 10, 15, 20 or 30 years. If the rate is
fixed for a period, such as the first 2 or perhaps 5 years, and then reverts to
a variable rate it is known as an adjustable rate mortgage or ARM.
When the ARM rate becomes adjustable, it will move up or down periodically
according to a specified market index. These can include the Prime Rate, the
LIBOR or the Treasury Index among others.
With the adjustable rate, some of the risk of changing interest rates that would
otherwise fall on the bank is transferred to the borrower. They are therefore
cheaper averaging somewhere between 0.5% to 0.2% lower than a 30-year fixed rate
mortgage. If the rate is particularly volatile or difficult to predict than a
fixed rate mortgage may not even be possible.
In the majority of cases, the savings of an ARM outweigh the risks of a rising
interest rate. Especially where the mortgage is for ten years or less.
Fees
Lenders may charge various fees when giving a home loan or mortgage. These
include entry fees; exit fees, administration fees and lenders mortgage
insurance. There are also settlement fees (closing costs) the settlement company
will charge. In addition, if a third party handles the loan, it may charge other
fees as well.
Banks usually charge a valuation fee, which pays for a surveyor to visit the
property and ensure it is worth enough to cover the mortgage amount. This is not
a full survey so it may not identify all the defects that a house buyer needs to
know about. Also, it does not usually form a contract between the surveyor and
the buyer, so the buyer has no right to sue if the survey fails to detect a
major problem. For an extra fee, the surveyor can usually carry out a building
survey or a (cheaper) "homebuyers survey" at the same time.
About the Author:
Joseph Kenny is the webmaster of the loan information sites http://www.selectloans.co.uk/
and also http://www.ukpersonalloanstore.co.uk. At the Personal Loan Store you
can find all the different loan types explained.
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