Explaining The Different Types of Home Loans

By: Allan Wilson

There are many types of loans out there and it can be very confusing. This set of tips will give you an idea of the types of loans out there. Remember that loans vary depending on the bank, so be sure to do your homework.

Yearly Fixed Rate

A yearly fixed rate loan is the most common type of loan. You and your broker decide on your interest rate and the years that you have to pay off your loan. Loans start at 10-years and go all the way to 50-years.

Reduced Rate

A reduced rate loan is like a yearly fixed except you get a lower rate in exchange for your agreement not to refinance or sell within the first five years.

No Down Payment

If you don't have a down payment, most banks offer a no down payment option. Most states also offer no money down programs. Ask your broker what is offered near you.

Construction

If you are planning on building your home, you'll need to get a construction loan. Many banks offer interest-only payments until your home is done.

Adjustable Rate

A basic adjustable rate mortgage (ARM) is like a basic fixed rate loan except your interest rate will change during the life of your loan. How it changes depends on the going interest rates. There are also fixed period ARM's, which means that a part of your loan has a fixed interest rate and another part will be flexible.

Low Document

Most banks offer low document loans. They have significantly less paperwork. This type of loan caters to self-employed borrowers who are unable to provide full financial statements and other evidence of their income.

Split Rate

Split rate loans combine fixed rate loans and adjustable rate loans. They're great in times when the interest rates are fluctuating. The loan can be split many ways: 60% variable, 40% fixed or 50/50 splits are most common.

Line of Credit

Line of credit loans have become popular due to their flexibility and features. It's like a credit card: it allows you to withdraw funds up to a set limit at any time

Non Conforming

Non-conforming (or jumbo) loans are for people who need to borrow anywhere between $417,000 and $2 million. These loans typically have higher interest rates and are for those with very good credit.

Beware of Honeymoon Introduction Rates

Some banks want your business so much that they'll entice you with low interest rates, then forget to inform you that these rates only last six months to a year then skyrocket up. Make sure that you know your interest rate throughout the entire length of your loan.

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