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What are the Benefits and Risks for Home Lending?

By Jamie Richardson | February 16, 2021

There is a technical process behind home lending that not everyone is familiar with. But it’s necessary information especially for young adults who are interested in getting their hands on their first residential property. 

We have gathered everything anyone would need to know about it, including the step-by-step process, benefits, and risks involved. Before you buy a home, you should be aware of the pros and cons of home lending.

Home Lending 101

A home mortgage is a loan given by a financial institution like a bank or a mortgage company. This loan is for the sole purpose of purchasing a residential - it cannot be a form of commercial or industrial - property from the owner for a number of years. 

You may be wondering why a mortgage is also referred to as ‘home lending.’ That’s because the property owner transfers the title to the lender (or the financial institution involved) for a certain amount of time. All parties must sign a contract, stating that the title will be transferred back to the owner once the final loan payment has been made and all terms are settled.

Since you are not buying the property, there is a fixed or floating interest rate to be paid. The lifespan for an average home lending is between three to 30 years. 

Getting your hands on a home mortgage sounds intimidating, so you should be aware of the advantages and potential risks before closing the deal. 

Benefits of Home Lending

Having your own residence is part of the American Dream. There are a number of benefits you can enjoy from a mortgage and we’ll list them down below.

  • Great Affordability

Home lending makes it possible for working-class people to have their own place of residence. While it takes effort to be qualified for a bank loan, it’s not impossible. You just need to show enough paperwork about your income and that you have the capacity to fulfill timely payments.

  • Cost-Effective Loan

A mortgage comes with a relatively low-interest rate compared to other forms of borrowing, like a personal loan. The interest differs among property owners but generally, it’s between 8% to 12%. 

  • Good Practice Towards Being Financially Responsible

It’s no secret that properties and real estate are getting more expensive. If you have a steady income, taking a home loan is a good way to be financially responsible with your cash flow. If you are responsible for your finances, then a home loan will be a very good and secure choice for you.

  • Guaranteed Property Safety

When it comes to properties, the logistics can get overwhelming. But this is a great advantage of home lending. The property owner will ensure that your place of residence is free of any issues. At best, they will call in a builder or contractor to review that the building is legal. It is the owner’s responsibility that the property has complete clearances and is free of any legal disputes. As a borrower, you don’t have to worry about any of these things. 

  • Increases Loan Eligibility for Future Transactions

If you pay diligently over the years, your loan eligibility increases automatically. The property owner and the bank will classify you as a safe and responsible borrower. Of course, you can use this to your advantage for future loans (ex: buying property or a car) at a more affordable interest rate. 

Risks You Need To Know About Home Lending

While there’s a handful of benefits, it is important to consider the risks that go with it. Home lending is a big responsibility for a long period of time. You should know the potential risks so that you are fully informed and prepared for whatever comes.

  • Long-Term Commitment

Home lending is a big commitment that spans several years. You would be in debt for a significant amount of time of your life. So once the deal is closed, you need to be responsible with controlling your expenses and fulfilling the loan repayment monthly or annually. You and your family might have to hold back on certain luxuries for a few years or until you are stable with your finances.

  • Liable During Unforeseen Circumstances 

During the period of the loan, unforeseen circumstances can occur. These will make it considerably difficult to repay the loan. Unforeseen events like divorce, accidents, illnesses, losing a job, or death in the family can take a toll on your finances. These could even affect your physical and mental health, adding to the burden of repaying the loan. Of course, the worst-case scenario is you’d have to give up the property earlier than expected.

  • Losing Other Investment Opportunities

This is one side effect of being tied to a mortgage. As you continue to pay for your loan, you lose the opportunity to invest your money in other things. Investment opportunities like stocks or shares could yield valuable returns in a short amount of time. Taking on a loan could keep you from growing financially in other avenues.

These are all the basic things you need to know about home lending. Make a proper assessment of your finances and responsibilities if you are considering taking a mortgage.

Jamie is a 5-year freelance writer who enjoys real estate. He is currently a Realty Biz News Contributor.
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