Mortgage Basics - Home Loans for Many Uses

Buying a Home, Refinance for Lower Payments, Consolidate Debt or Tap into Home Equity

The mortgage is one payment which can strike fear into many homeowners, male or female. The dream of owning a home for some in a fantasy because of their financial position. Others have bought more house than they can afford, all in an effort to achieve status or push their dream. Many first time buyers fail to understand all the costs associated with owning a home.

Monthly Payment

A good rule to go by for a monthly mortgage payment is ideally about one fourth of your gross income. anything over that and meeting your monthly payment may be a struggle. No one wants to take a chance of losing their home and any equity built up in it. When calculating the true cost to owning your own home, make sure you also include any and all cost or services a landlord my include, like lawn maintenance, water, utilities, property taxes and insurance. For example if a water pipe breaks the landlord covers the repair cost. As a home and mortgage owner you get the whole bill.

Home Refinancing to Lower Monthly Payments

Some homeowners refinance their home when financial situations change. One financial change could come from a drop in mortgage interest rates. Refinancing under these conditions can result in a lower payment each month on your mortgage, both in interest and principal. The net result is more available cah each month or the additional money can be applied to the loan balance to pay off the mortage quicker.

Refinancing to Tap Home Equity

An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. For example, if a person owns a home worth $100,000, but does not currently have a lien on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a lien on title placed by the lender of the equity loan.

Many lending institutions require the borrower to repay only an interest component of the loan each month (calculated daily, and compounded to the loan once each month). The borrower can apply any surplus funds to the outstanding loan principal at any time, reducing the amount of interest calculated from that day onwards. Some loan products also allow the possibility to redraw cash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.

The rate of interest applied to equity loans is much lower than that applied to unsecured loans, such as credit card debt.

Debt Consolidation

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, which is most commonly a house (in this case a mortgage is secured against the house.) The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

Before you make any financial decisions on refinancing and using your home as collateral make sure you review all your options and get good council if needed.

Information on this site is provided for informational purposes only.

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