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Tuesday, 4 March 2014

How Does a Home Loan Work?

With the constant rising costs of living, many people feel that it makes more sense to rent a house as opposed to buying one. It also may seem more practical to rent than to buy because, oftentimes, more money down is required to buy a home rather than rent depending on a consumer's credit situation and scores. However, although renting may seem more sensible and convenient in many situations, overall, owning your own home is the best way to go.

When you rent a home or apartment, you are literally throwing your money away. There is no way to redeem the money you have paid the landlord. In actuality, you are paying your landlord 100 percent interest. However, when you buy a house, you can redeem a lot of the money that you've paid into the mortgage via building equity in your home. Building equity in a home means that you are building value in your home, condo or apartment. The way a homeowner calculates equity is to subtract the present amount owed on the home from the present selling value of the home. The amount that is left over is the equity in your home. You can't do this when renting. There is no appreciation in value when renting a home or apartment or condo.

A Bad Mortgage Home Loans is a loan given to new buyers to purchase a home. The mortgage loan generally requires a down payment. However, there are many types of loan structures available today. Typically, if a down payment is required, the lending institution will pay the balance of the purchase price, and the new homeowner must pay the balance of the loan over a period of years in installment payments. The purchase balance of the property is also assessed an interest rate that is applied usually over a period of 30 years. Depending on the lending institution, the loan packages available and the buyer's credit scores, a buyer will receive an interest rate that is suitable to his situation. Those who have excellent credit scores generally receive lower interest rates.

When applying, the buyer fills out an application for the home loan. A verification process begins to verify the buyer's credit information, work information, years on the job, residential information, income and any other pertinent information. Generally, a prequalification letter can be issued based on the person's credit information, but after that a full approval process takes place, and this can take 3 to 4 weeks, depending on the lending institution. After all the information is verified and the application is approved, the closing date is set so that the loan can officially close, the buyer can obtain the keys at closing and take ownership of the new home and the buyer can begin building equity.

The lending institution will generally keep the deed to the house as security for the mortgaged home loan. This is done because the home has not been fully paid off yet. However, every time you make an installment on your mortgage loan, the value in the home will increase, thus building equity. The building of equity in your home simply means that you have interest and alienable rights to the property. Full equity is provided when the mortgage debt is fully satisfied. Until then, the mortgagor is allowed only the portion of the house value which she has paid for.

For example, if the mortgagor desires to obtain a home equity loan, she is only allowed to borrow against the equity in the home--that is, within the amount limit that is arrived at when subtracting the balance owed on the home from the value of the home. Many homeowners obtain home equity loans to pay off other larger debts or even to pay for their children's college expenses.

After weighing the costs and the benefits, buying a home instead of renting one is clearly more sensible and a much better investment in the long run.

Related Post:
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How to Get Approved for a Home Loan

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