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Generation PDF 417 in Software Loans

A loan is a promise to pay money. Loans are commonly used to buy assets, although some folks often turn to debt consolidation loans to pay off other debts I tell you more about that in 18. Here s how it works. The lender gives the borrower money in exchange for the borrower s promise to pay it back. (The promise is usually in writing, with lots of signatures and initials.) The borrower normally pays back the loan to the lender with periodic payments that include interest on the loan balance or principal. The amount of the loan is reduced after each payment. The borrower incurs interest expense while the lender earns interest income. While most people think of a loan as something you owe (a debt), a loan can also be something you own (an asset). For example, say you borrow money from your brother to buy a car. In your Quicken data file, the loan is related to a debt money that you owe your brother. In your brother s Quicken data file, the loan is related to an asset money that is due to him from you.

There are several types of loans, some of which are designed for specific purposes. Here s a quick summary of some of what s available, along with their pros and cons. This list is not exhaustive. Financial institutions are always coming up with new loan products, and it s impossible to keep up with them here. If you re interested in a loan product that isn t mentioned in this chapter, consult the financial institution that is offering it to learn more about how it works and what it can do for you.

A mortgage is a long-term loan secured by real estate. Most mortgages require a down payment on the property of 10 percent or higher. Monthly payments are based on the term of the loan and the interest rate applied to the principal. The interest you pay on a mortgage for a first or second home is tax-deductible. If you fail to make mortgage payments, your house could be sold to pay back the mortgage. A balloon mortgage is a special type of short-term mortgage. Rather than make monthly payments over the full typical mortgage term, at the end of the fifth, seventh, or tenth year, you pay the balance of the mortgage in one big balloon payment. Some balloon mortgages offer the option of refinancing when the balloon payment is due.

A home equity loan or second mortgage is a line of credit secured by the equity in your home the difference between its market value and the amount of outstanding debt. Your equity rises when you make mortgage payments or property values increase. It declines when you borrow against your equity or property values decrease. A home equity loan lets you borrow against this equity. A home equity loan has two benefits: Interest rates are usually lower than other credit, and interest may be tax-deductible. For these reasons, many people use home equity loans to pay off credit card debt; renovate their homes; or buy cars, boats, or other recreational vehicles. But, as with a mortgage, if you fail to pay a home equity reserve, your house could be sold to satisfy the debt.

A reverse equity loan provides people who own their homes in full with a regular monthly income. Instead of you paying the lender, the lender pays you. This type of loan is attractive to retirees who live on a fixed income. The loan is paid back when the home is sold often after the death of the homeowner.