Getting the funding you need sounds easy, doesn’t it? “Just get a loan.” It’s that simple, isn’t it? But you might not realize that there is a plethora of loan options out there. Things such as title loans, personal loans, mortgages, and so many more.
Whether you are currently a homeowner or are looking to purchase a new home, understanding personal loans is the best piece of education that you could have going into the process. Here are five things that you should absolutely know about loans when buying a home or planning for a big home renovation.
1. How Do Personal Loans Work?
Generally speaking, these are in installments. That means that you borrow a certain amount of money and then pay it back with interest in installments, generally a month at a time. The range for these kinds of loans is generally 12 to 84 months unless you’re taking out a mortgage, which is more in the 15- to 30-year range.
When you have paid off the loan in full, your account is closed, and you would then have to apply for a new loan if you needed further funding.
2. Your Credit Score Is Everything
Credit makes things a lot easier in life and buying a home is one of those. Whereas something such as title loans don’t require a credit check, buying a home absolutely does. The higher your score, the better interest rate that you can get, how much you can borrow, and even how much you’ll need to put down.
Having a low credit score means you can still get a home, but it is going to seriously cost you. Keep your credit score tight for the best home buying opportunities and getting the best loan possible.
3. Be Prepared to Put Money Down
There was once a time when no-money-down mortgages were easily accessible. Ever since the housing market crash, that number is closer to 20% down, though requirements have begun to soften just a bit. For first-time buyers, there are 5% down loans.
In any event, know that you will have to put money down before purchasing your home and that it can cost you quite a bit ($40,000 on a $200,000 loan if you come in at that 20%). This can impact the home that you decide on and your ability to purchase it.
4. Adjustable Versus Fixed Loans
You may have heard these terms in your search for a new home and don’t really get what they mean. This just means that the interest rates involved can either change (adjustable) or stay the same (fixed). With a fixed rate, you might come in at a slightly higher rate, but hold that rate should interest rates spike.
This is really about the risk you want to take. There is a possibility you could save with an adjustable rate based on recent trends, but you could also wind up costing yourself money going this route.
5. 15-Year Versus 30-Year Mortgage
This really depends on your financial standing. The benefits of a 15-year mortgage is that interest rates tend to be lower than those of a 30-year mortgage. On the flip side, the latter requires a lower minimum monthly payment.
The biggest benefit to a 15-year mortgage is paying off the home earlier. Being able to do so gives the homeowner options after their mortgage has been paid off, like controlling spending and early retirement.
Either option is fine depending on your own personal plan and budgetary needs. Higher payments in a shorter time or more interest, but longer to pay off.