A loan is basically one of the financial tools used as a source of capital for starting up a business, injecting into the core capital of a running business or for buying something either for personal use or business use. Loans can be broadly classified as personal or business loans. Home loans fall under the personal category. Home loans are also known as mortgages.
A secured home loan means that it is secured by the equity value of a borrower's place of residence. This means that failure to pay will result in the financial institution repossessing the place and selling it to recover its money. This is not good for the credit.
An unsecured loan means that the home is bought without the need to secure it against any personal asset or the residence itself. Mostly unsecured mortgages may be for low valued properties. Failure to pay may result in court action being taken against the defaulter as well as damaged credit rating affecting future borrowing transactions.
The various types available get their definition based on the interest being charged and the borrower's purpose for needing to borrow. A borrower may use it to purchase a residence, to refinance or to get extra cash for use in repairs and even education. A first or second mortgage and equity home loans can be used to purchase and improve the place of residence.
Amongst the home mortgages available, there are fixed rate and adjustable rate. In fixed rates, the interest remains the same over the life period of the loan. In adjustable interest rate, there is a specific time period when the rate will be fixed, either one, two or seven years, after which the interest rate on the mortgage may move up or down at regular time periods.
The amount a borrower can take up for the first time have no specific size but is available 80% of the property's fair market value. Depending on the agreement a borrower has with the financial institution as well as their credit rating, which is a grading on their ability to repay is based on their past loan repayments, this value may be as much as 85 to 90% of the value of the property. Mortgages above these limits are known as jumbo loans and their value may go up to $1 million dollars.
For a borrower to be considered for the home mortgage, the financial institution giving the loan looks at several factors. These are like the value of the property, the income of the borrower, their expenses and credit rating. It also includes the amount of down payment to be made if the borrower is taking up the home loan to purchase a residence.
These factors greatly affect the terms a borrower will get when they go to seek for a home loan. It is therefore advisable for a borrower's to assess their financial position before getting a mortgage. Failure to do so can result to getting unfavorable terms or a default especially if they don't understand the terms of the mortgage.