The sun loan is a home mortgage that allows you to borrow money to buy or build a house. It’s also called a second mortgage or home equity loan. A sun loan is a great way to finance your dream home, but it has some risks and pitfalls. If you want to know more about this kind of loan before getting one, here are some things you need to understand.
What Is The Sun Loan?
The sun loan is a typical home loan that allows you to borrow up to 80% of the value of your property. This means that if your house has a value of $500,000, then you can get a loan of $400,000. However, there are certain restrictions on how much you can borrow. For example, you cannot borrow more than what your property is worth.
You Can Use Your Home As Collateral
Another thing you should know about the sun loan is that you can use your home as collateral. In other words, you can pledge your home as security against the loan. You can do so by signing an agreement with the lender stating that you will not sell or transfer any part of your property without informing the lender.
How Does The Sun Loan Work?
If you have decided to take out a sun loan, you must be aware that it works in two different ways. First, you can apply for a fixed rate sun loan where you pay interest only until the loan matures. After that, you will start paying both principal and interest. Second, you can opt for an amortizing sun loan where you pay off the entire loan amount at once.
Risks And Pitfalls Of The Sun Loan
If you decide to go ahead with the sun loan, ensure you fully understand all the risks involved. Here are some of them:
1. Interest Rate Risk
As mentioned earlier, you will be charged interest only until the loan maturity date when you take out a sun loan. But, after that, you will have to pay principal and interest. So, if you don’t manage your finances well, you could pay more than what you borrowed.
2. Property Value Risk
Another risk associated with a sun loan is that your property may decrease in value over time. If this happens, you might be unable to repay the loan because you won’t have enough cash to cover the loan amount.
3. Repayment Risk
When you take out a sun bank loan, you are pledging your home as security against it. That means that if you default on the loan repayment, the lender can repossess your property.
4. Lender’s Default Risk
When you take out a sun mortgage, you put your property on the line. If the lender defaults on its payments, you will lose your home.
5. Tax Implications
If you take out a sun home loan, you will have to declare the loan amount as income. Also, you will have to file tax returns annually to show how much you paid back to the lender.
6. Lien On Title
Your home secures a sun loan. That means that if anything goes wrong with your property, the lender can seize it.
7. Mortgage Insurance
If you take out a sun debt, you must buy mortgage insurance from the lender. This is usually done to protect the lender in case something terrible happens to your property.
8. No Equity Build Up
The sun loan does not allow you to build equity in your property. That means that even if you increase the value of your home, you won’t be able to benefit from it.
9. No Refinancing Option
Once you have taken out a sun loan, it isn’t easy to refinance it. That is why most people who took out a sun loan were forced to keep paying high monthly instalments.
10. High Cost
One of the most significant disadvantages of a sun loan is its cost. It costs around 2% of the total loan amount per month.
11. Short-Term Loans
A sun loan is considered short-term because it lasts less than five years. Most people find getting a long-term sun loan hard because they need money urgently.
12. Bad Credit Score
People with low credit scores cannot take out a sun loan. They also face higher rates of interest.
13. Poor Documentation
To qualify for a sun loan, you have no choice but to provide poor documentation. You will have to submit documents like proof of employment, proof of income, etc.
14. Limited Options
There are limited options available for people with bad credit scores. They can either opt for a personal loan or an unsecured loan.
15. Hard to Get Approved
Getting approved for a sun loan is extremely tough. Many lenders refuse to give loans to applicants with bad credit.
16. Low-Interest Rates
Most banks offer low-interest rates for sun loans. However, these rates are still higher than other types of loans.
17. Higher Monthly Payments
You will have to make higher monthly payments for a sun loan than a regular one.
18. Longer Duration
Sun loans last longer than any other type of loan. For example, a sun loan can last up to 30 years.
19. Less Flexibility
Unlike personal and unsecured loans, there are few ways to modify a sun loan.
20. More Expensive
Compared to other kinds of loans, a sun loan is more expensive.
21. Not Allowed To Borrow From Multiple Banks
Banks do not allow borrowers to borrow from multiple sources at once. You cannot apply for a sun loan from two different banks simultaneously.
22. Fewer Choices
Banks often limit the number of sun loans they issue. As such, you may not have enough choices when you want to take out a sun loan.
Read Also : Will A Home Loan Advisor Help You With The Mortgage Procedure
