What Are The Different Homeowner Loans

What are the different homeowner loans

Buying a house is the biggest financial commitment most people make, and the vast majority of homeowners need a loan to buy their house. Many people don't realize that there are different types of homeowner loans, and it is important to know the various options and how they work.

Mortgage

The most common homeowner loans is a first mortgage. This is a loan that people take out to buy their primary residence. Mortgages are what's know as "secured" loans, because the property that the loan is for "secures" the loan. What that means is that the house is collateral, so if you don't make your monthly payments, the lender can foreclose on your home, repossess it and eventually sell it to recoup the money it loaned you.

Home equity loan

A home equity loan also is sometimes referred to as a second mortgage. Once you have paid down your mortgage after several years and your home has likely appreciated in value, which means you have equity in your home. Equity is the difference between what you owe on your loan and what your home is worth. If you have at least 20 percent equity, lenders are willing to loan you money against any additional equity. Say, for example, your home is worth $200,000 and you owe $120,000 on your mortgage. You have 40 percent equity, so you could get a home equity loan for half of that equity, or $40,000.

Refinance

If you already have a mortgage on your home, you can replace it with another one by what's called refinancing. People often refinance to get a lower interest rate, or they might refinance to tap into their home equity rather than taking out a second mortgage. Refinance loans work just like the mortgages that they are replacing.