Very few people have the amount of cash on hand required to pay for the entire cost of a new home. Banks know this and offer a wide range of financing options for a variety of different reasons.
You can talk to a representative from your bank to get a better understanding of which loan is right for you. But it’s always good to prepare ahead of time. Today, we’ll take a look at the differences between home loans and home equity loans to prepare you for your conversation with your bank.
What is a Home Loan?
The cost of buying and maintaining a home isn’t getting any cheaper. That’s why more and more people are turning to lenders to help them finance their home-related expenses. That’s where home loans come in. These large, long-term loans let approved borrowers spread out the cost of a home or home related expense over years.
Home loans aren’t limited to house purchases either. In fact, there are a lot of home loan types that are uniquely designed to serve a variety of different needs. Read ahead for a brief breakdown of the various types of home loans available to borrowers and what they are used for.
Home Purchase Loans
A home purchase loan is easily the most popular type of home related loan type. Home purchase loans are a standard type of home loan that’s used to cover eighty to ninety percent of the market value of a residential property. The interest rate on these loans can vary depending on your bank, and your preferences.1
Land Purchase Loans
Land purchase loans work a lot like a standard home purchase loan. These loans are given by banks and borrowers to help buyers finance the purchase of a plot of land. Much like home purchase loans, banks are often willing to lend borrowers eighty to ninety percent of the total cost of a plot of land.
Home Construction Loans
A home construction loan is available to borrowers that are looking to construct a home on a plot of land that they already own. If the plot of land was purchased in the same year that the borrower seeks the loan, they may be able to get the plot’s purchase price included in the home construction loan. Regardless, the borrower is required to provide the lender with an estimate of the overall construction cost ahead of time.
Home Improvement Loans
If you already own your home and would like to secure financing for a home renovation project, you have options too. Home improvement loans are loans designed to help cover the cost of a range of home renovation projects including repairs, painting, water proofing, roofing, electrical projects, landscaping and more.
Home Extension Loans
Home extension loans work a lot like home improvement loans. Borrowers who own their own house can seek home extension loans to pay for the potential expansion of their house. Those looking to add more rooms to an existing home can request a home extension loan from their preferred lender.
NRI Home Loans
An NRI, or non-resident Indian, is an Indian citizen who has lived in India for less than half of a year during the course of the previous financial year.2 NRIs who are interested in securing a loan to help them purchase a residential property in India can do so by applying for an NRI Home Loan.
What is a Home Equity Loan?
Those that already own their own home have the ability to take on additional debt with a home equity loan.3 Home equity loans, often called second mortgages, allow you to use the equity you’ve built up on a property to secure funding for just about anything you’d like to pay for. Home equity loans are available in two types, including Fixed Rate loans and Home Equity Lines of Credit loans.
Fixed Rate Loans
Fixed rate loans are for borrowers that own their own home and need a lump-sum payment. These fixed rate loans let homeowners take advantage of the unused monetary value of their properties as a way to cover large expenses. The interest rates of these loans are usually fixed, and the balance can be paid over time.
Home Equity Line of Credit
Home equity lines of credit, or HELOCs, operate a lot like a credit card. These loans provide borrowers with a revolving credit limit that can be borrowed, re-paid, and re-borrowed continuously and at your convenience. Much like a credit card, interest is only paid on the amount that you borrow.
Knowing the differences between the types of home loans available to home buyers and home owners is very important. Home buyers don’t have to wait until they can afford the entire cost of a home before they can enjoy the equity-building benefits of owning a home. And homeowners don’t have to put off their repair or renovation project until they can afford to pay off the whole thing in cash.
You should always borrow responsibly, but part of borrowing responsibly is understanding what your options are. If any of the products mentioned here sound appealing, reach out to a local lender and explore the finer details of the various home loans available to you.