When it comes to real estate, there are a lot of terminologies to learn. If you’re not familiar with the different types of loans that are available, it can be difficult to know what kind of financing is best for your situation. This can lead to some pretty stressful situations, so this article breaks down the difference between a home loan and loan to buy land options so you know which one is right for you:
Purpose
Home Loan: You want to own your own home and have decided that now is the right time for you to do so. You’ve received an offer on a particular house and would like someone to help you get the money together for your deposit.
Land Loan: You have something specific in your mind where you can build your dream house or turn it into rental properties, but don’t have enough cash on hand at present.
Terms
When you apply for a loan, you’ll be asked about your preference for the term. The loan term is similar to the duration of time you’ll have access to the funds.
In most cases, a home mortgage is fixed and has a set interest rate over its entire duration, whereas land loans are variable and can change based on market conditions. If you’re looking for more flexible terms that allow you access to more money if needed, then a land loan may be right for you.
Interest rates
Now, let’s talk about interest rates. The difference between a land loan and a home loan is that the home loan generally has lower interest rates than a land loan.
This is because the value of your house determines most of what you pay for in a home mortgage, whereas with land loans, it’s not just the value of your house that determines how much money you owe; it also depends on how much the government values the land around your property.
Down payment
You will also need to pay for the land. If you want a loan from a bank, you will have to put down 20 percent of your own money as a down payment. If you are buying on your own, with money from friends and family members, then the amount of down payment may be less than 20 percent, but it is still required by law.
The same goes if you are getting a loan from an individual private lender like yourself or maybe even someone you know who has some extra cash lying around—they may let it slide if they see how badly you want the land and how hard working the person seems; however, this is never guaranteed so always be prepared for anything.
Credit score
However, the credit score for home loans is different from that for land loans. In the case of a land loan, your lender will look at your track record as far back as 10 years and decide on how safe it is to lend money to you over the next five years.
According to financial advisors like Lantern by SoFi, “What kind of loan you should get to buy land will depend on the cost of the land, how you plan to use it, and how large a down payment you can make.”
If you’re looking to buy a home or land, it’s important to know what kind of loan is right for you. At first glance, these two types of loans seem similar. But some key differences can affect your finances for years down the road.