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Different Types of Home Loans
“Home loan” and “mortgage” are both interchangeable terms. A mortgage involves a creditor and debtor (you). When the debtor takes out a home mortgage loan he uses the property he is buying as collateral for the loan. If the debtor fails to pay the loan off the creditor will claim ownership of the house. Home mortgage loans are repaid using an amortization schedule. In the early years of an amortization schedule the debtor is paying mostly interest instead of the actual loan. Towards the end of the home mortgage loan’s life the debtor is paying off more of the loan instead of interest. How this works depends on how long your loan is, most are either 15 or 30 years long.
There are two main types of amortized loans a fixed rate mortgage and an adjustable rate mortgage. The fixed rate mortgage, or FRM, is pretty self explanatory. The interest rate you pay for the life of your home loan is fixed, it will never change. In exchange for this security you will have to pay a higher interest rate then market value at the time the new home mortgage loan starts. An adjustable rate mortgage, ARM, is the exact opposite. The interest rate of an ARM changes based on the market index rate and can change either monthly or annually. Since there is little security in your interest rate using an ARM usually a discounted interest rate is given at first.
Home Lending Explained
There are several different types of home loans available to consumers, depending where you are in your homeownership cycle.
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New Home Loan
A new home mortgage loan is the beginning of what will be a long journey. This is when you decide how long your loan should be, what type of mortgage rate you want and if you want a specialty loan. Specialty loans include discounted loans, capped loans and interest only loans. Specialty loans are very rare and rarely offered by financial institutions.
Home Refinance
Having problems with your mortgage? Are you paying too much? Is your interest rate to high? Maybe you chose a fixed rate mortgage and the market index rate is far below your fixed rate. Or you chose an adjustable rate mortgage and it has skyrocketed. Luckily you can always refinance your home loan. Usually refinancing a loan will extend the length of your loan, this will cause monthly payments to go down and lessen the burden on you. Refinancing also helps you to pay off your high interest debt, an example being credit card debt.
Home Equity Loan
Your dream house can do a lot more than provide a roof over your head. It can also help you pay off those pesky bills! Having trouble coming up with money for Sara’s college education? Need help paying the bills for little Jimmy’s braces? A home equity loan can do this for you. When you take out a home equity loan you use your house and collateral for the loan. It is similar to getting a new home loan, except you aren’t using your house as collateral to pay for your house. There are two types of home equity loans: Closed End and Open End. A close end home equity loan gives you all the money up front and you can’t borrow anymore. Then you pay it off over a period of time. The most common closed end home equity loans last 15 years and has a fixed rate. An open end home equity loan allows you to choose how often to borrow money, basically your house becomes a line of credit that can last up to 30 years. Usually open end home equity loans have adjustable rates. Home equity loans are great ways to consolidate your debt. |
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