The Pros & Cons of Mortgages

The Pros & Cons of Mortgages
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Most people can't pay for a home with cash, even if they're selling an existing home before buying a new residence. Because of this, they need to apply for a mortgage loan to finance the purchase of a home. Mortgage loans come with their own sets of pros and cons. Before you fill out a Uniform Residential Loan Application to apply for a mortgage loan of your own, analyze the positives and negatives of taking on mortgage debt. It's the best way to determine if a mortgage loan is right for you.

Increases Homeownership

Mortgage loans have allowed more consumers to become homeowners. Most buyers can't come up with the entire price tag of a home -- it's not easy to plunk down $200,000 or more in cash. When you take out a mortgage loan, a lender covers the cost of buying that home, with the home's seller receiving a lump-sum payment covering the sales price. You pay back your lender with interest over a set number of years, often 15 or 30. You will have to make your mortgage payments each month until you pay back what you've borrowed.

Interest Adds Up

For the buyer, interest is a definite negative associated with mortgage loans. Interest is what allows mortgage lenders to make a profit on lending you mortgage dollars. But interest also dramatically increases the amount of money you'll pay for your residence. For instance, if you take out a $200,000, 30-year fixed-rate mortgage loan at 5 percent interest, you'll pay a total of more than $186,000 in interest if you hold onto your mortgage loan for its full 30 years.

Foreclosures and Credit Scores

Taking out a mortgage loan also puts you at risk of losing your home to foreclosure and suffering the credit hit that comes with that. If you fail to make your mortgage payments on time, your lender has the right to foreclose on your home, evict you and take over ownership of your property. This will dramatically damage your three-digit credit score, causing it to fall by at least 100 points.

A foreclosure will also remain on your credit report for seven years, making it difficult to apply for new loans or credit cards during this time. If you take out a mortgage loan, make sure you are financially responsible enough to handle the monthly mortgage payments. But even if you are responsible, you still face the risk of foreclosure; if you lose your job, for instance, you might not be able to make mortgage payments that seemed affordable while you were employed .

Access to Equity

Taking out a mortgage loan, though, does give you access to equity. Equity is the difference between what you owe on a mortgage loan and what your residence is worth. If your home is worth $200,000 and you owe $150,000 on your home loan, you have $50,000 worth of equity.

You can then borrow off this equity in the form of home equity loans or home equity lines of credit to help fund such major purchases as a home-improvement project or covering the cost of your children's college education. The best part of home equity loans and lines of credit is that they come with lower interest rates than do credit cards, so you won't have to pay as much to borrow this money.