If you are planning a home of your own, chances are that you’ll be shopping for a suitable mortgage to realize your dreams. Opting for debt is nearly unavoidable for an average citizen when it comes to a major financial decision like buying a house. As a potential homeowner, it helps to be familiar with certain terms associated with home loans, and their interpretations.
First home mortgage, second home mortgage, lines of credit, and loan to value are terms that get tossed around with relation to home finance. The first home mortgage is typically used to purchase the property. Until it’s paid off in full, it will remain the first claim to be redeemed in case of default. For example, if you put up $100,000 and take out $200,000 to buy a house, the latter amount is your first mortgage. Over time, as you repay the first mortgage, the difference between your house’s current market value and the outstanding loan amount becomes your home equity. This home equity becomes the basis for any future financing you may need on the strength of your house.
Second mortgages are given based on the home equity available, and the lender’s loan-to-value limit. The loan-to-value (LTV) limit is the proportion of property value that the lender is willing to give, and it typically lies in the range of 85 to 125 percent of the property value. A point to be noted is that first and second mortgages combined cannot exceed the LTV limit. A Home Equity Line of Credit (HELOC) is a good option if the second loan needed is a smaller amount like $10,000 or $30,000.
A good credit record is a must if you want to make the most of the financing options available through your home. An eye on market trends will also help you to home in on the most suitable financing option for the situation.