Mortgage and Home Loan Options
Various types of property and home loans are available to meet the variety of different needs of individuals who are purchasing a new existing home, repairing, remodeling, or just maintaining a home they already own, or for those who are building a brand new home from the ground up. Additional home loan types make possible the restructuring of an existing loan or allow the homeowners access to existing home equity as other needs arise.
The Construction Loan
A home construction loan is a short-term home loan used to pay only for the construction costs associated with new home construction. These interim construction loans are often funded by the lender in several stages as the work is done. One type of construction loan can be converted to a traditional mortgage once the work is complete.
Another example is a construction only loan which usually has a term of one year or less. There are advantages and disadvantages of each type depending on the borrower’s situation. And the requirements to qualify for any kind of construction loan are typically more stringent than those for a conventional mortgage due to the absence of existing collateral at the time the loan is funded. Using a reputable general contractor who is also well known to your lending institution can often make the entire process much easier.
Make sure to get pre-approved for the loan before incurring any significant expenses with your builder such as preparation of blueprints or other pre-construction costs associated with the new home design.
The Conventional Mortgage Loan
The term “conventional mortgage” is typically used to refer to a home loan that is not insured by a federal government entity. Interest rates on conventional mortgage loans tend to be slightly higher than interest rates on government guaranteed loans, but they do not normally have a mortgage insurance requirement. The interest rates on a conventional loan are determined by various factors such as the length of the loan, the amount you want to borrow, and whether the rate is fixed or adjustable.
With 10, 15, 20, 25, and 30-year terms available, the borrower has a wide range of options to choose from to suit their budget and their particular circumstances. The shorter loan terms will have correspondingly higher monthly payments.
Loan applicants will usually be required to provide proof of current income and employment, copies of past tax returns, current bank account statements, and permission for the lender to view a current credit report.
The Home Equity Loan
If your home is currently worth significantly more than your outstanding home loan balance, you may be able to use the equity as collateral on a home equity loan allowing you to borrow a portion of that accumulated value. Most home equity loans allow a homeowner to borrow as much as 80% of a home’s current value that is in excess of the outstanding mortgage balance. Often a home equity loan will have a lower interest rate than a credit card or personal loan, and so it may be an attractive option to address unexpected expenses or emergency needs. Most lenders will require a current debt free equity of at least 15% along with a new property value appraisal.
The Home Improvement Loan
Home improvement loans allow homeowners the cash needed to upgrade, repair, or maintain their home while often resulting in an increase in overall home value. Normally easier to apply and qualify for, home improvement loans are available in a range of amounts with a wide variety of terms to accommodate particular situations, and the interest rates can range from quite low for those borrowers with excellent credit to quite high for applicants with credit problems. Home improvement loans are usually granted for a specific project and lenders will consider the homeowner's actual equity in approving the requested amount.
Refinancing an Existing Loan
Refinancing an existing loan can often be an attractive option and result in better loan terms and features. Replacing your current loan with a new one can potentially save you money by obtaining a lower interest rate. Refinancing can also result in a lower monthly payment, reduce the loan term, or change the loan type, and may even be used to consolidate multiple loans into one.
But there can be drawbacks. Upfront costs can offset potential benefits and outweigh expected savings. And extending the term to lower monthly payments can substantially increase the total interest paid over the life of the loan.
Choosing a Lender
When choosing a bank or a mortgage company for a home loan of any type, always shop several lenders to compare their lending requirements and terms. Interest rates for home loans, associated closing costs, and the required down payment can vary widely from one institution to the next.
Smaller regional banks are often more willing to work with loan shoppers than are larger national banks, and often a potential lender such as Citizens State Bank with deep roots in the local community will work a bit harder to match potential borrowers with the best home loan options and products for their needs.