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First-Time Buyer Loans vs. Home Equity
Loans: Two Financing Avenues for Home
Buyers
The steps involved in purchasing a home for
the first time can be intimidating and stressful. However,
first-time home buyers can avoid such a scenario and expedite
as well as facilitate the process by doing their homework. One
of the critical points that prospective home buyers should
research and weigh is whether first-time buyer loans are a
better fit than home equity loans. This is an individual
decision that depends on the purchasera€™s needs. The following
synopsis sheds light on the these two key types of home loans
and aims at helping buyers choose what is best for
them.
1) First-time buyer
loans:
First-time buyer loans do not
apply solely to first-time home buyers; they are also available
for (1) buyers who prove that they have not owned a home within
the previous three years and (2) buyers who do not own a home
at the time of the new home purchase.
Buyers to which lenders seek to
extend first-time buyer loans are those looking to buy in a
designated census tract, those with limited resources and those
in lower income levels. First-time buyer loans often apply to
certain geographical areas designated as lower-income areas.
For instance, a household with an income below 70% of a
county's median income would qualify for a first-time home
buyer loan.
First-time buyer loans vary
depending on where they are offered and financial assistance is
provided in one of several ways:
• Accept a very low (or no)
down payment
• Cover all or part of the
interest costs
• Limit fees that lenders
are authorized to charge
• Defer payments Extend
grants
• Forgive
Loans
Advantages of
first-time buyer loans:
First time buyer loans enable
purchasers to attain the status of home ownership more easily.
Since homeowners maintain their properties and contribute to
the economy, communities also stand to benefit from first-time
buyer loans.
Disadvantages of
first-time buyer loans:
First-time buyer loans have strings and
restrictions attached. First, they usually place a dollar limit
on the property to be purchased. Buyers will be restricted to
homes on the lower end of the spectrum. Secondly, the property
must be used as the purchaser's primary residence. Thirdly, the
targeted property must satisfy certain requirements, such as
being free from safety hazards and being kept in good
condition.
Some of the main
pitfalls posed by first-time buyer loans are the
following:
• A
lower value home may not be of interest to the prospective
purchaser
• If the buyer sells the
property too soon, he will lose some of the benefits offered by
the first time home buyer loan
• The consumer may be
limited to a short list of loan types
• The buyer may have to pay
to recapture tax for some of the benefits he
received
2) Home equity loan
comparison:
With home equity loans, home
buyers obtain financing by pledging the property as collateral.
These loans are also attractive to prospective purchasers
seeking to borrow a relatively large sum of money or who lack
good credit.
Lenders, who regard these home
owner loans as relatively safe, will likely be more liberal.
This is because (1) the borrower has no chance of disappearing
with the house or hiding it in cases of default and (2) the
buyer is more likely to make the payments if he is at risk of
losing his home.
Advantages of home
equity loans:
• They are easier to qualify for if the
borrower does not have good credit
• They usually have a lower
mortgage rate
• Home buyers can obtain
relatively large loans
• Home equity loan payments
may be tax deductible
Disadvantages of home
equity loans:
• Borrowers who default on
their loan payments risk forfeiture of their home
• Illegitimate deals with
scammers who will cheat the borrower out of his most
valuable asset
A person's first home purchase is
a big deal as it involves the investment of money, time, and
energy. First-time buyer loans and home equity loans have
assisted many buyers in overcoming money hurdles. It is
imperative, however, that prospective home buyers shop around
and take into account the risks of each option available to
them. The right preparation can only yield positive results and
help first-time home buyers strike a good deal.
by
By: Yara Zakharia,
Esq. - 1 Sep
2008
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Source: http://www.refinance-database.com
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