What is a home loan?
A home loan is made in agreement with your lender – be it your bank, credit union, or private lender – to borrow a set sum of money, which you agree to pay off over a set amount of time (also known as the ‘term’). Depending on your contract, you’ll be expected to pay off your mortgage/home loan either monthly or biweekly.
Make sure you’ve thoroughly read through your entire contract. For instance, your agreement might state that your lender can take legal action if you don’t make your payments. If you can’t make your payments, your lender can take possession of the property in foreclosure – in other words, they can take back the home.
What is the difference between a home loan and a mortgage?
A mortgage and a home loan are often used interchangeably to describe the same thing. But technically, a home loan is the borrowed sum, while a mortgage is the ‘agreement’ that makes the home loan possible.
What types of home loans are there?
Not all home loans are created equal, and home buyers can decide which type of home loan is right for them and their financial situation. Some popular types of loans include:
A fixed rate mortgage
A fixed rate mortgage is the most popular type of loan. The borrower is required to pay back the loan to the lender over a fixed time period, with a fixed rate. In other words, the interest rate stays the same over the time period. A fixed rate mortgage is generally more expensive than an adjustable rate mortgage (ARM), however the quicker you pay off your mortgage, the lower the interest rates will be. A fixed rate mortgage is more popular because it’s reliable and predictable for borrowers.
A fixed rate mortgage is best if you plan on staying in your property long term and prefer to keep a fixed budget.
An adjustable rate mortgage (ARM)
Unlike a fixed rate mortgage where the interest rates stay constant, an adjustable rate mortgage (ARM) means the interest can fluctuate over the term of the loan. Not everyone likes taking an ARM because of its risky nature, so to encourage borrowers with an ARM mortgage, lenders sometimes offer lower interest rates in the first year.
If you’re only planning on staying in a home for a few years, an ARM mortgage might be right for you.
How to shop around for a home loan quote
When shopping for a home loan, you’ll want to find the best deal possible for you. Doing enough research will help you decide on a reputable company. But surprisingly, many people don’t bother shopping around for a loan, and settle for paying way more than they have to – which could mean paying tens of thousands of dollars extra.
That’s why you should get 3-4 quotes when shopping for a home loan. To get a home loan quote, ask different lenders to give you a quote. Because they compete with each other, having more than one offer will give you some leverage to negotiate with all of them.
How can I qualify for a home loan?
In order to get a home loan or mortgage, you should get pre-approved first. To do so, you’ll need to submit a loan or mortgage application, and the lender will check your credit score, and verify your income and tax returns within the last 2 years.
FYI, getting pre-approved is not the same as getting pre-qualified. Pre-qualified simply means the lender thinks you may meet the requirements for a loan based on a brief search into your credit history. On the other hand, getting a pre-approval means you have a much stronger chance of securing a loan.
What happens after a pre-approval?
A pre-approval letter from a lender makes it easier to get a real-estate agent to work with you. It’s basically a vote of confidence that you have the funds, and you’re a reliable customer. Once you’ve been pre-approved you’re ready to start shopping for a house!