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The Truth about Home Loans  

by John George

The Truth about Home Loans

Originally, the term mortgage was used to refer to any type of simple transaction or trade that took place where the purchaser used either physical property (such as a boat) or a plot of land as a form of payment. Nowadays, when you hear the word mortgage, all you can probably think of is paperwork, foreclosures, and debt. It's true that mortgages have gotten more complicated over the years, but getting a home loan is a lot less scary once you understand what exactly it is you're getting into.

Types of Home Loans

There are really only about 5 or 6 different types of loans:

* Fixed Rate - If rates go up, your rate stays the same, but know that rates can also go down (and are known to do so from time to time). * Adjustable Rate - Means that your interest rate is controlled by the lender. Usually have a fixed increase amount (lender may only increase the rate by so much each year). * Amortized - The most common type of loan. Payments are made on a regular basis (usually monthly). * Negative Amortized - This is when the amount paid (or "amortized") isn't enough to cover the amount of interest due. The unpaid interest is just calculated back into the loan. * Piggyback Loans - A second loan that typically covers about 80% of the first loan. * Private Mortgage Insurance - Referred to as PMI, reimburses the mortgage lender in case the home buyer isn't able to afford their payments.

Factors that Determine your Qualification

The goal of getting a home loan is to get pre-approved. Lenders look at several factors to determine if you may qualify for a loan.

* Credit score - Having a bad credit score doesn't always mean you won't be able to get a loan, but having a good score does help. If you do have a low credit score, there are plenty of mortgage options that are designed for people with low credit. * Assets - A lender typically needs to know if you currently have enough money or to pay off your loan. * Debt Ratio - One of the biggest determining factors. This is your income to debt ratio. Typically this ratio needs to be at least one. * Property - Back to the original meaning of a mortgage, the home itself must be worth enough to act as collateral for your purchase.

Down Payments, Up Payments, Left Payments, Right Payments

What exactly is all your money going to each month? With the increasing cost of housing in recent years, many home loans don't require you to put very much down, and even more are starting to offer loans with no down payments at all. A typical monthly payment is broken down into four parts:

* Principal - The total amount of the loan left to pay. * Taxes and Insurance - The cost of any damage to the home and what the local government charges. * Interest - The cost to borrow the money, month after month.

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