A home loan, also known as a mortgage, is a type of loan used to finance the purchase of a home. The borrower takes out a loan and agrees to pay back the lender, with interest, over a set period of time, typically 15 or 30 years.
There are several components to a home loan, including:
Principal
This is the amount of money that you borrow.
Interest
This is the fee charged by the lender for the privilege of borrowing money. The interest rate is typically a percentage of the loan amount and can be fixed or adjustable.
Closing costs
These are the fees associated with obtaining a home loan, such as origination fees, appraisal fees, and title insurance.
Down payment
This is the amount of money that you pay upfront when you purchase a home. The larger your down payment, the lower your loan amount and monthly payments will be.
Term
The term is the length of time over which you will pay back the loan. Most home loans have a term of 15 or 30 years.
Prepayment penalty
Some loans come with a penalty for paying off the loan early. This is designed to compensate the lender for the loss of interest they would have received if you had kept the loan for the full term.
Fixed-rate vs. adjustable-rate
A fixed-rate mortgage has an interest rate that stays the same throughout the life of the loan. An adjustable-rate (AR) has an interest rate that can change over time. AR interest rates are typically tied to a benchmark, such as the prime rate, and may increase or decrease based on changes to the benchmark.
Take Home Tip
Obtaining a home loan typically requires a good credit score and a stable income. The lender will also consider the value of the property you are purchasing and your debt-to-income ratio, which is a measure of your ability to afford the loan.
NB: This is not a piece of financial advice but for educational purposes only.
