A homeowner loan is a type of loan secured with the borrower’s home equity. Home equity is the figure that one would get by subtracting the loan amount from the market value of the home owned by the borrower.
When a homeowner loan is taken the home is taken as the collateral for the loan. As in case of any other secured loan the lender here has a legal claim on the home if the loan is not repaid. As long as the repayments are being made on time and the terms and conditions of the loan are being satisfied the borrower has the physical possession of the home. If the loan is not paid back fully then the lender has the option of taking the physical possession of the home.
The lender normally takes possession of the home in the extreme case and issues sufficient warnings before doing so. If we look at it from the lender’s point of view, there is no other way of recovering the loan amount than auction the home. The borrower should try his/her best and pay heed to the warnings of the lenders and make the repayments timely.
Why are homeowner loans attractive?
In case of homeowner loans credit history of the borrowers matter little as the lender always has the option of selling off the home and recoup the loan amount. It is for this very reason that these loans are easy to obtain for individuals of all credit levels.
As the loan amounts are backed by a security they have lower interest rates than the unsecured loans. The only thing that the borrower must be careful about is that he/she should have sufficient home equity to back up the loan amount.
There is absolutely no restriction on how the borrower uses his/her homeowner loan.
The borrowers find these kinds of loans very good as it gives them a chance to take a large amount of loan at an attractive interest rate. The factors that may play a key role in deciding the loan amount and the interest rate are the amount of home equity, borrower’s credit rating and the borrower’s income.
How to get a good deal on home owner loan?
The borrower should research as much as possible to know about the various loan options available in the market. The borrowers may start by gathering the loan quotes of different lenders. The loan quotes can be obtained by requesting online. After that the loan quotes should be compared to see the loan rates. Once a few borrowers are short listed on the basis of only the loan rates the terms and conditions of the borrowers should be studied in detail. Factors that should be taken into account while deciding in favour of a particular loan quote are – the repayment amount, the repayment period, various fees applicable under different conditions, fixed/variable interest rate. The borrowers would do well to calculate the future value of all the payments that he/she makes in case of different loan quotes. The loan quote having the lowest future value of the outflow (repayment to the bank) should be chosen.
A last word...
A very important factor that the borrowers should consider while going for a particular loan is the method of charging interest. If the method is not mentioned in the terms of the loan the interest will be charged on the variable rate method. This rate keeps on fluctuating basing on the change in the bank base rate decided by the Bank of England, UK’s central bank. The borrower under the variable rate method has to pay according to the new interest rate.
The borrower can protect himself/herself from a rate change by opting for a rate lock. Rate lock is a method by which a borrower requests the loan provider to charge interest at a particular rate. The loan provider may agree to the request and implement it for a particular period or the entire term of the loan.
However, by accepting the rate lock the borrower may not be able to take advantage of a lower interest rate in case of a decrease in the interest rate. The borrower may take the help of the experts while predicting the rate trends.
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