This brochure can help you become familiar with basic mortgage loans, determine what terms are best for your situation, and identify issues you should be aware of before taking out a mortgage loan.
Mortgage loans are secured by a borrower’s home. This means that if you are unable to make the monthly payment for the mortgage, the lender can foreclose and take your home. The amount of your loan will be determined by your home’s value minus any liens or unpaid mortgage(s).
Standard home equity loans or second mortgages are closed-end loans, meaning the loan proceeds are usually made available in a lump sum. These loans can have a fixed term, a fixed interest rate, and fixed monthly payments, or they can carry an adjustable interest rate that fluctuates with an index, such as the prime rate. Some adjustable-rate mortgages (ARMs) are “hybrid ARMs” which have a fixed rate for an initial period, then a fluctuating rate for the remainder of the loan.
Home equity lines of credit are open-end loans or revolving credit lines. This means you can draw in amounts of money and at times when you have the need. The lender provides you with checks or other means to access your credit line. You may draw upon the account as long as you don’t exceed your line of credit and are not in default. The amount of the monthly payment is based on the amount of credit you have used. Some lenders may charge a fee for the use of the line of credit. Home equity lines of credit can have a fixed or adjustable interest rate.Can You Afford This Loan?
Before applying for a mortgage loan, make sure you have enough money to cover your monthly expenses. If you’re spending less each month than you take home, and the additional debt load will not cut into the amount you’ve set aside for savings, only then should you consider taking on additional debt.
Once you have established the amount you want to borrow, take time to figure out what you can afford for a monthly payment without putting a strain on your budget. If you are applying for an ARM, you will need to think carefully about your ability to make future monthly payments once the loan “resets,” or adjusts to a new rate after the initial payment period.