Types of Loans

A Wide Array of Choices Available to You

Not all homes are built alike, and similarly, not all loans are built alike as well. For some, a standard conventional loan is exactly what they are looking for when shopping for a home. Others may be considering a home equity loan or line of credit while another shopper may be considering an Adjustable Rate Mortgage based on credit or other factors in their life. Here are some of the more common loan types and how they might apply to you or your situation.

Fixed Rate Loans

Fixed rate loans are usually very conventional and straightforward. For this loan type you will have a set interest rate throughout the life of the loan that will not change. Available in your standard 30 year loans, fixed rates can also be found in 10, 15, and 20 year loans as well. Handy in unstable economic times, the fixed rate loan may start off at a higher interest rate in the short term, but as interest rates fluctuate higher over time, you could end up saving thousands over the life of your loan.

Adjustable Rate Loans

Adjustable Rate Mortgages (ARMs) come in many different types and are suitable for a variety of financial situations. ARMs are loans that start off at a fixed rate for a period of time (anywhere from 1 to 10 years), after which, the interest rate on the loan may adjust upward or downward, based on market factors. This adjustment will have the effect of changing your monthly payment amount in order to continue the payment schedule of your loan and have it paid off in time. ARM loans usually start off at the lowest interest rates available on the market, and are not usually as strict on credit requirements before you can acquire one. If you are not prepared for the market adjustment of an ARM, however it can mean serious consequences and make for a nasty payment surprise in the future.

FHA/VA Loans

Federal Housing Association (FHA) and Veteran's Association (VA) loans are loans that are guaranteed by the government in order to help certain people buy a home. Usually FHA loans are used for first-type homebuyers only and they come with a Private Mortgage Insurance (PMI) that must be paid with the loan each month until the equity in the home has reached 20%. VA loans are offered to all active duty and retired United States service members and are likewise guaranteed by the government. VA loans often come with certain extra conditions, such as requiring the seller of a home to pay closing costs, that may make it harder to negotiate the purchase of a house.

Balloon Loans

Balloon mortgages pose a higher risk than other loan types because they come with a substantial payment due at the end of the loan term. These loans are usually short term (less than 10 years) where the owner will pay only a fixed interest amount on the loan for a period of time. Once the loan term is reached, however, the entire balance of the loan will be due and payable immediately. Useful for those expecting to come into an inheritance or making significant income, but without the immediate cash-flow for a traditional mortgage, the balloon mortgage should be approached with extreme caution. Please visit our home mortgage and home buying tips guide for more details.