What Is the Difference In Home Loans?
Home loans, commonly called mortgages, are loans extended to individuals who wish to purchase a residential property. The basic process of home loans seldom varies: a financial institution will lend a borrower a large amount of money to buy the property; in return, the homeowner pays back the lender the amount borrowed, plus interest, over a number of years. However, the terms of these home loans can vary greatly, making individual loans quite different.
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Fixed vs. Variable Rate
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Home loans can be split into two main types, based on how interest is assessed on the loan---fixed and variable rate. Under a fixed rate loan, the level of interest that the borrower pays never changes. Each payment that he makes on the loan is the same size, as the interest charged remains consistent. Under a variable rate loan, the rate of interest paid by the borrower shifts constantly, based on the prevailing market rate of interest.
Interest Rates
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In addition to the way in which interest is assessed, loans also vary depending on how much interest the borrower has to pay. Generally, borrowers with better credit ratings and higher incomes are offered loans with lower rates of interest than poorer borrowers with lower credit ratings. This is because lenders must match the creditworthiness of the borrower to the return they receive on a loan.
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Payment Plan
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Home loans can be paid back in a number of different ways. Generally, mortgages are structured so that the borrower makes monthly payments over a period of 10 to 30 years. At the end of this time, the loan will be paid in full. However, some loans are structured so that borrowers pay more at the beginning or the end of this time period. In addition, some loans may command larger down payments than others.
Fees and Points
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When taking out a mortgage, a borrower can expect to pay a large number of fees. These fees can take many forms, including fees for services, such as appraising the home and servicing the loan, as well as special fees called "points." These points are a form of prepaid interest that the borrower pays to the lender. Generally, the more points a borrower pays upfront, the less interest he has to pay on the loan.
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