What is Home Loan and Key types of home loans

A home loan  is a secured loan that borrowers obtain in order to purchase a home. Because a home is the largest purchase many individuals will ever make, most borrowers utilize home loans to assist with their home purchase.

Home Loan plays an important role in helping one with easy availability of your dream home. There are a number of banks that offer home loans at low interest rate. You may want to either want to buy a new home or construct one; it has few formalities starting from submitting the application for disbursement of loan amount. Keeping basic documents ready in hand saves time and effort. Home Loan amount varies from person to person depending on the repayment capacity, age and income of the loan seeker, his/her dependents and so on. The loan is available to those who are eligible for a contract such as any person who is not less than 18 years, must not be insane and should not be insolvent or bankrupt. Loans are offered to salaried individuals, professionals or businessmen or self-employed individuals and NRI’s.

Some facts related to home loan

Borrowers must apply for a home loan with a lender such as a bank or credit union. Lenders require borrowers to provide proof of income to demonstrate that their income level allows them to comfortably afford the loan. Borrowers must also allow the lender to evaluate their credit history. This lets the lender determine how likely the individual is to make his mortgage payments in a timely manner.

Significance of home loan

 Mortgage loans carry an interest rate. This interest rate may be fixed and unchanging or variable and subject to change, depending on the type of loan program the borrower selects. The lower the interest rate, the less the individual pays over time for the privilege of the home loan.

Key types of home loans 

To help you understand which type of home loan may be best suited to your needs, let’s take a look at the key types of home loans available and how they work. There are hundreds of different home loans out there in the mortgage marketplace. But fundamentally, they are all based on two key things: 

• Principal – the amount of money you borrow 
• Interest – how much you pay to borrow the money. It’s calculated on the outstanding principal                                                                                                                                          From here, there is a wide variety of home loan features and structures to choose from, and it’s worth knowing what’s involved with each to make an informed decision. 

Variable rate loans This is the most popular type of home loan in world. The interest rate you pay may vary in line with movements in market interest rates, so you can expect the repayments to vary (up and down) over the course of the home loan. 

Fixed loans With this type of home loan the rate you pay – and the home loan repayments, are fixed for a set period, usually between one and five years. This makes it easier to budget for repayments and you are protected from increases in market interest rates. The downside is that if rates fall, you could end up paying more than necessary. 

Split loans Many lenders will let you fix one part of your home loan, while the remaining portion has a variable rate. This can give you the best of both worlds – some protection from rising rates though still with the ability to benefit from any rate cuts.