Types Of Home Loans
Understanding the types of home loans available can help you to make an informed decision and make the home buying process less scary.
If you want to leisurely search for your dream home without being pressured for time and then worry about selling your home later, then one of these loans might be for you. They must be obtained by the lender that you are using for your new house. You can either get one to pay off the amount owed on your old house, or add the two debts together. This loan is a short term loan and is paid off when the house sells so you will only have to worry about the big payments for a short time. Of course there is a cost associated with it in a large amount of prepaid interest.
Your current finances, anticipated changes to your finances and how long you plan to own the home all factor in on the decision as to which home loan is best for you. Ask your loan officer to review the types of mortgage loans with you so you can get an idea of which is best for your situation.
Some types of home loans are used only for special cases such as mortgage bridge loans. This loan type is what the name implies - a bridge between buying one property and selling another.
Fixed Rate Mortgages. With a fixed rate mortgage, your payments towards principal and interest never change over the life of the loan. These types of home loans have a bit higher interest rate than adjustable mortgages, but if you expect interest rates to rise these are a much better deal in the long run. You can get these mortgage loans for 10, 15, 20 and 30 years. The majority of the interest is paid at the beginning of the loan with a small ratio of the principal being paid and as time wears on you are paying off more and more of the principal. This loan is good if you are planning on keeping your home for a long time or just like the security of knowing that your payments won't increase.
Adjustable Rate Mortgage. These type of home loans are sometimes referred to as ARM's and have several different variations that you can buy. Basically, an adjustable rate mortgage is one whose interest rate will vary resulting in fluctuating mortgage payments. The appeal of these loans is that they have a lower interest rate to begin with - sometimes 2 or 3 percent below that of a fixed. They typically have a time period that the interest rate is good for and after that specified time (usually a year but different mortgages programs vary so check with your loan officer) the interest rate may go up depending on market conditions. Some of them have a cap on the adjustment so that your rate won't jump up by too many percentage points. If, of course interest rates fall over the year, your payments will go down so this is a good type of loan to get if you think interest rates will go down. An adjustable rate mortgage can get you into a more expensive house and if you expect your salary to increase each year, this can cover the rate increase so it won't hurt quite so much.
Balloon Mortgages. One of the unusual types of home loans, this isn't widely used and should probably only be considered under special circumstances. This type of loan has fixed payments for a certain amount of time but is usually short term (5 to 7 years) and the entire principal must be paid back at the end of the loan. Sometimes, the payments consist of only interest and other times it can be a combintation of interest and principal.
Convertible or 2 Step Mortgage. These types of mortgage loans are a combination of the fixed and adjustable. It has an initial period of 5 or 7 years where the loan is paid using a fixed interest rate – a bit lower than a regular 30 year fixed and a bit higher than an ARM. Then at the end of the initial period, it converts to an adjustable rate mortgage for the remainder of the loan. This is best of you plan to keep the house for a long period. It allows you to pay fixed payments in the early years and as time goes on, and your salary rises, the fluctuations of the adjustable rate won't be as painful.
Reverse Mortgage. This is another one of the special type of home loans that cater to a certain situation. Usually this is used by older persons who need money to pay for living expenses or care. In this type of mortgage the bank pays you! Usually this loan type is limited to those age 62 or older who own their home with no liens or loans. When the house is sold, the loan must be repaid. This is a good loan for an older person who wants to stay in their home but needs money for real estate taxes or health care. When the person dies or moves into a nursing home, the property is sold and the proceeds are used to pay back the loan which includes principal plus interest.