Mortgage Definitions
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| Mortgages - Home Loans |
WHAT IS A MORTGAGE?
Most home buyers have to borrow money in
order to purchase their home. Few have enough
money sitting in the bank, or in other easily
saleable assets, to pay the entire cost of
the home at once. (Even those few who do
have enough money usually find it financially
advantageous – perhaps for extra tax relief
-- to borrow some of the money.) The home
loan they receive is called a "mortgage."
Generally, a mortgage is a loan of money
to the home owner secured by a "lien"
on the real estate.
There are basically three types of mortgages
that you can select among when purchasing
or refinancing a home:
Fixed Rate Mortgages
Adjustable Rate Mortgages
Balloon Mortgages
Another type of mortgage - a "home equity loan" - is typically
used by homeowners to borrow some of the
equity they have built up in their homes.
They usually involve a "floating"
or adjustable rate of interest and are amortized
over a period of years.
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Home Equity
Home Equity Loans
Home Equity Line of Credit |
The current market value of a home minus
the outstanding mortgage balance. Home equity
is essentially the amount of ownership that
has been built up by the holder of the mortgage
through payments and appreciation. Typically,
residential property is bought through a
mortgage, which is then paid off over a number
of years, often 15 or 30. After the mortgage
has been fully repaid, the property then
belongs to the mortgagor, namely the buyer.
In the interim, however, the buyer simply
builds up equity in the home. This is what
a home equity loan borrows against. Although
that equity cannot be sold, banks will lend
money against it. Home equity loans offer
significant tax savings due to the fact that
the interest paid on a home equity loan is
tax-deductible.
Home equity loans are often used to consolidate
other debt with high interest rates (like
credit card debt), to finance large expenses
(such as college or a wedding), or to purchase
other costly items. There are two main types
of home equity loans. The first type is the
traditional home equity loan, also known
as the second mortgage, which lends out a
lump sum of money that must be repaid over
a fixed period. The second type is the home
equity line of credit, which provides the
borrower with a checkbook or a credit card
that is used to borrow funds against the
home equity. Funds borrowed from a traditional
home equity loan start accruing interest
immediately after the lump sum is disbursed;
funds borrowed from a home equity line of
credit do not begin accruing interest until
a purchase is made against the equity.
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