A home purchase loan, also called a mortgage loan, is money that is borrowed to pay for the cost of purchasing a home or condominium unit. There are a large number of mortgage lenders who offer these loans, and each of these lenders has a number of different loan types that are available to borrowers. This can make the task of finding the right mortgage loan confusing, but with a little research, you can find the optimal loan for your specific situation.
Most home loans break down into two basic types: the fixed-rate mortgage and the adjustable-rate mortgage. A mortgage loan with a fixed interest rate has a single rate of interest that is set and does not vary over the life of the loan. This means that the monthly payments are always the same, which makes for easier budgeting. In contrast, an adjustable-rate mortgage (ARM) loan has an interest rate that can vary over time. The rate is most often based on a well-known financial market index, such as the Treasury bill rate, although the majority of ARMs offer a special low interest rate for an introductory period. An ARM is usually less expensive than a fixed-rate loan at first, but the payments down the line can be unpredictable as the interest rate increases.
The advantages of a home purchase loan include:
- Buy Home with Small Down Payment. Providing the money which, when combined with a down payment, allows people to purchase a home;
- Tax-Deductible Interest. The amount of your monthly mortgage payment which goes toward paying the interest on your mortgage is deductible.
- Build Up Equity. You build equity (the part of your home which you actually own) over time as a portion of your monthly mortgage payments pays down the principal which you owe to the lender.
The first step to getting started with a home purchase loan is to talk with a reputable lender. They can help you determine your maximum purchase price for a home, which will be based on a number of factors, including your current income, your savings, and your credit rating. In addition, a lender is an expert on all of the different types of mortgages and can provide you with an education as to the various home purchase loan options to determine which one is the best type for your financial situation.