What Are the Different Types of Home Loans When It’s Time To Buy?
With so many types of home loans out there, how do you know what will work best for your situation? Whether you’re thinking about a mortgage purchase in the future, or you’re ready to buy now. This guide will help you narrow things down to help you understand what are the different types of home loans available when it’s time to buy a home.
Main Types of Home Loans
There are many different types of home loans, but for the average borrower, they usually fall into the following categories:
- Fixed rate home loan
- Adjustable rate home loan
- Interest only home loan
Fixed Rate Home Loan
As the name suggests, a fixed rate loan does not fluctuate throughout the length of the loan.
Several factors will go into determining your rate, but it is influenced by the current national interest rate.
This home loan is one of the most common in the United States. It’s a great option for borrowers who are looking for a predictable, low-risk option.
For these reasons, it’s also one of the best types of home loans for first-time homeowners. Likewise, these loans usually pay over a comfortable term of 30 years or 15 years.
No matter how much the national rate changes during the term of your loan, the interest rate on this type of loan will remain the same.
These loans are less complex compared to others, and you can easily get an idea of what your payments will be using a simple mortgage calculator.
Adjustable Rate Home Loan
Adjustable rate home loans, also referred to as “ARMs,” do not have a fixed interest rate throughout the term of the loan.
ARM loans involve more risk than fixed rate loans, but they also have their benefits.
While the interest rate on these loans does fluctuate, there is typically a limit on the amount it can change during the term of the loan.
These loans also have a lower initial interest rate, which makes them an attractive option for borrowers who plan on keeping their home only a short period of time, or who hope to refinance in the near future.
Another benefit of this loan is that it allows you enough time to improve your credit, so then you can refinance and get a better, more predictable loan.
Adjustable rates generally match the following terms:
- 3/1 ARM
- 5/1 ARM
- 7/1 ARM
- 10/1 ARM
In other words, these loans have fixed interest rates for either three, five, seven, or 10 years. Then the rate adjusts annually for the remainder of its 30-year amortization.
Interest Only Home Loan
As you can probably guess, interest only home loans allow borrowers to only pay interest on the loan for a certain period of time.
These loans have a similar structure to adjustable rate loans because the interest-only period ranges from the first five, seven, or 10 years. After that, the monthly payments can go up significantly.
Interest only home loans involve a much higher risk, making them a popular option for wealthy borrowers with irregular income.
There are countless types of homes loans that can be customized for every borrower’s unique situation. Which loan has worked best for you? Feel free to comment on what are the different types of home loans you have used and share your experience!
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