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Aug 31, 2020

The Beginner’s Guide to Home Loans

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Okay, you’re finally ready to buy a house. You’re cruising the market, scouting neighborhoods, and just beginning to look at your finances. Unfortunately, however, house hunting is a lot more difficult than the shows on HGTV portray it to be. Here are a few basic financing terms you should know before showing up to your bank when looking for a house.

First, you should know what a mortgage is. A mortgage is essentially a long-term loan where you borrow money from a bank and pay it back, with interest, until you’re the full owner of whatever you bought. Basically, it’s a type of loan for property. It’s also usually a secured loan, where you put something up for collateral that the bank can take in case you stop making payments.

You also should understand what a loan is, more broadly. A loan technically occurs anytime one person borrows a lump sum of money and agrees to pay it back at a later date. Typically, formal loans involve interest, which means that you pay back a little more than you originally borrowed. Mortgages are always a type of loan, but not all loans are mortgages.
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Home equity loans are loans for a set amount of money that’s secured by your home — in this case, your home is the collateral. The danger, here is, that you might lose your home if you stop making payments. But many use a home equity loan to make home improvements, pay for their child’s education, or invest in some other significant item — they’re usually used for big purchases that you can’t otherwise afford.

This is actually almost a synonym for a second mortgage, which is probably another term you’ve heard. They’re essentially the same, but have slightly different rules for how much you can borrow and when you can get the loan. Home equity loans typically occur after you already own a property, whereas a second mortgage can be taken out while you’re still paying off your first mortgage. Your credit history, financial state, and bank will all determine what you’re allowed to do, however.

Hopefully, this brief guide helped explain some of the differences between the types of loans you can take out as you prepare to buy a house. Nothing about the process is simple, but with a little research and a lot of expert help, you’ll be homeward-bound in no time — happy house hunting!
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