First Time Home Loan
A first time home loan can be purchased either to live in them, or for investment purposes. Either way, one of the two homes of the first homeowner becomes investment property. Investment property implies that the owner will derive income in form of rent, or any real estate appreciation at a later date. The difference between first mortgage and home equity loan is that a home equity loan is a mortgage loan given to the borrower against first lien on the residential property, whereas first mortgage is as the name indicates, first lien on the same residential property.
The borrower gets the first mortgage, i.e., the home equity loan, on better terms and conditions. Therefore, interest rates on this mortgage are lower, and the term of repayment is longer, effectively bringing down the equated monthly installment payable on this loan. Unlike this, first mortgages are for shorter duration. The amount of loan granted under first mortgage is also lower since it is only against the capital appreciation since the first loan, and any loan amount repaid. Interest rates applicable to first mortgages are higher.
A first time home loan would definitely be required for financing the investment property. For this purpose, an investment property purchaser can choose to take a first mortgage on the first home. Since real estate properties appreciate over a period of time, the value of the house increases. In addition, the first homebuyer would have paid part of the mortgage on the first home by this time. Effectively, there is some value of the first house, which can be withdrawn, and utilized towards down payment for first home. Therefore, a borrower takes a first mortgage on the first house to enable him to meet the down payment requirement for purchasing the first home.
The lender may be agreeable to offer only 60 to 70 percent of the value of first home as the loan amount. This is because lender is not confident that the borrower needs the house, and will pay the amounts regularly. Therefore, the first homebuyers often take a first mortgage on an existing home. The terms and conditions of mortgage loan for purchasing the first home are also not as good as the terms and conditions applicable to the home equity loan granted to the homebuyer on the first home. The lender offers such loans at higher interest rates, and even the term for repayment is less. This translates into higher equated monthly installments payable by the first homebuyer.
There are several advantages of owning a first home. Rents increase quite regularly, and these can nullify the negative impact of inflation on income in retirement. Apart from this, the homeowner gets another asset, on which loans can be taken for meeting any emergencies. The interest component in the equated monthly installments paid during any year can be set off against income of that year, effectively reducing the taxable income, and therefore tax. If need be, the first homeowner can also sell the first home, and pull out the capital invested along with the capital gains. Capital gains accumulate over the interim period and are taxed only when the homeowner sells the property. Effectively, the wealth of the first homeowner keeps on increasing without the homeowner paying any taxes for a long time.