What You Need to Know to Get Started When Financing a Home

Are you a first-time home buyer? If so, are you looking to purchase your first house? The reasons for buying a new home varies from one person to another. What is important is that you know and understand the different financing options that are available to you.

Mortgage: A long-term loan financing a home for the first time

The most common way to finance your real estate purchase is via a long-term loan referred to as a mortgage. According to Investopedia, a mortgage is a “debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.

The reality is that real estate is costly to buy and not many people have the funds saved up to make this purchase possible. Therefore, banks and other financial institutions offer qualified buyers long-term loans to enable them to pay for the home purchase.

Furthermore, the lender has a claim on the house while the loan is still active. In other words, should you not meet the monthly repayment commitments, the bank has the right to foreclose on the house. You will then lose the property as well as the money that you have already paid to reduce the outstanding loan amount.

Ways to finance your purchase 

There are different ways of financing a home purchase. As noted above, a traditional mortgage from a bank is the most common way of buying a home. Furthermore, as a first-time home buyer, you qualify for additional benefits such as reduced interest rates and reduced deposit amounts, etc. In the hope of attracting the first-time home buyer, different financial institutions will offer additional extras such as well as home buyer clubs and first-time homebuyer education courses.

To help you with some basic information, here are several ways to fund your new home:

FHA-insured mortgage 

The best way of describing an FHA-insured loan is to quote Wikipedia. Therefore, an FHA insured loan is a “US Federal Housing Administration mortgage insurance backed mortgage loan which is provided by an FHA-approved lender.” Furthermore, the aim of an FHA-insured loan is to assist American citizens who, under normal circumstance, would not be able to afford to buy their home.

The Federal Housing Administration, commonly known as the FHA, does not give loans out to consumers. The job of FHA is to insure the loan against the future default of the borrower, hence, the mortgage insurance premium. This, in turn, reduces the risk that lenders take when extending loans to borrowers.

Family Loans  

It is becoming increasingly common for parents to lend their children the money to purchase a home. This arrangement usually ends up as a win-win situation for both parties as parents can realize a higher return on their money by charging a slightly higher interest rate than they would get under normal circumstances. Furthermore, children would be able to borrow money at a lower rate than they would get from a bank. It is worthwhile noting that, while this might sound like an idea arrangement (and for many it is), there is a slightly higher risk of parents losing their investment due to non-payment of the loan from their children.

Securities-backed mortgage 

In a nutshell, a securities-backed mortgage lender takes a certain percentage of a borrower’s stock investment portfolio as collateral for the loan for three to ten years. While the borrower holds these shares as collateral, they are considered inactive, and neither the borrower or the lender may trade in these stocks. The borrower also pays the interest on the loan amount for the duration of the loan. When the loan period has expired, the borrower has the option of selling the shares to pay for the loan capital, or he can take the shares back and pay the lender the total outstanding amount for the loan.

Cash purchase  

Even though it is highly unlikely that the first-time home buyer has managed to save the property’s full purchase price, it is a viable way of buying a home. Furthermore, in a perfect world, this is the best way to acquire a home. However, in real life, you would need to weigh up the advantages of renting a home while you save to buy a house versus the cost of renting a place and saving. I’m not sure how practical it is to rent a house while saving the total cost price of a new home. In essence, it might be better to take out a mortgage and use your monthly rent to pay off your property.

This content is by no means a comprehensive guide to what you need to know about home finance. Its aim, however, is to whet your appetite and give you an introductory guide into financing a home.

by nico2me