Understanding Different
Types of Loans
Today's
homebuyer has more financing options than have ever been available before. From
traditional mortgages to adjustable-rate and hybrid loans, there are financing
packages designed to meet the needs of virtually anyone.
While the
different choices may seem overwhelming at first, the overall goal is really
quite simple: you want to find a loan that fits both your current financial
situation and your future plans. Though this article discusses some of the more
common loan types, you should spend time talking with different lenders before
deciding on the right loan for your situation.
General categories of loans
Most loans fall into three major categories: fixed-rate, adjustable-rate, and
hybrid loans that combine features of both.
Other
hybrid loans may start with a fixed interest rate for several years, and then
later change to another (usually higher) fixed interest rate for the remainder
of the loan term. Lenders frequently charge a lower introductory interest rate
for hybrid loans vs. a traditional fixed-rate mortgage, which makes hybrid
loans attractive to homeowners who desire the stability of a fixed-rate, but only
plan to stay in their properties for a short time.
Balloon payments
A balloon payment refers to a loan that has a large, final payment due at the
end of the loan. For example, there are currently fixed-rate loans which allow
homeowners to make payments based on a 30-year loan, even though the entire
balance of the loan may be due (the balloon payment) after 7 years. As with
some hybrid loans, balloon loans may be attractive to homeowners who do not
plan to stay in their house more than a short period of time.
Time as a factor in your loan choice
As has been discussed, the length of time you plan to own a property may have a
strong influence on the type of loan you choose. For example, if you plan to
stay in a home for 10 years or longer, a traditional fixed-rate mortgage may be
your best bet. But if you plan on owning a home for a very short period (5
years or less), then the low introductory rate of an adjustable-rate mortgage
may make the most financial sense. In general, ARMs have the lowest introductory
interest rates, followed by hybrid loans, and then traditional fixed-rate
mortgages.
FHA and VA loans
U.S. government loan programs such as those of the Federal Housing Authority
(FHA) and Department of Veterans Affairs (VA) are designed to promote home
ownership for people who might not otherwise be able to qualify for a
conventional loan. Both FHA and VA loans have lower qualifying ratios than
conventional loans, and often require smaller or no down payments.
Bear in
mind, however, that FHA and VA loans are not issued by the government; rather,
the loans are made by private lenders. FHA loans are insured to the actual
lender and VA loans are guaranteed in case the borrower defaults. Remember too,
that while any U.S. citizen may apply for a FHA loan, VA loans are only
available to veterans or their spouses and certain government employees.
Conventional loans
A conventional loan is simply a loan offered by a traditional private lender.
They may be fixed-rate, adjustable, hybrid or other types. While conventional
loans may be harder to qualify for than government-backed loans, they often
require less paperwork and typically do not have a maximum allowable amount.