4 Basic Types of Home Loans

Dec 05 2010

4 Basic Types of Home Loans

Posted by Thomas Taylor in Finance News

There are more options available for home loans today unlike before. That’s why now it’s necessary for the consumers to become familiar with all mortgage option, as well as different interest rates, terms, and fees. Like this it will be easy for the consumer to choose the best suitable home mortgage option. Basic purpose of home loans is that they allow the consumer to purchase a home. Most of people are not having enough savings to buy a home, so they depend on home mortgage.

There are various home loan types and it’s necessary to understand these various loan types so that you can make a decent decision. When you understand the home loan types then it becomes easy for you to choose the certain type of loan, which really suits your financial conditions. The four basic home loan types are:

Fixed Loan
ARM (Adjustable Rate Mortgage) Loan
FHA Loan
VA Loan

1 – Fixed Loan

This is a fixed rate home loan in which mortgage retains the same annual percentage throughout the life of the loan. Most popular fixed rate mortgage time period is for 30 years. There are 15-40 years time period fixed rate mortgages and also 50 year mortgages. Fixed rate home mortgage allow homeowners the security of knowing the exact amount of their mortgage payment for the life of the loan, from the first payment to the last. For example, if the interest rate on your loan is 5% it will remain the same throughout the life of the loan. Your monthly payment will be fixed also as the rate is fixed. The only thing which is not fixed in this loan type is property tax fluctuations. It’s easy to understand this type of loan.

2 – ARM Loan (Adjustable Rate Mortgage)

ARM loan or Adjustable rate mortgage is not a fixed type of loan. It’s based on shorter term securities which fluctuate based on several financial indexes. This type of loan provides steady income to lenders and for borrowers its monthly payment fluctuates. ARM loans are having lower payments, which attract the borrowers. Sometime this type of loan is having option to convert or refinance it into a fixed rate mortgage. This type of loan can be good for you if you planned to live in your home for only a few years. Most ARMs are having interest rate cap on their periodic adjustments for the life of the loan so your monthly payment will never increase over a certain amount.

3 – FHA Loan

Federal assistance mortgage (FHA) loan is provided by the private lenders but it’s insured by the Federal Housing Administration. FHA loans are designed for the people who cannot qualify for the conventional loan. FHA loans are having lower qualifying ratios as compare to above mentioned type of loans. This type of loan often require smaller or no down payments. These loans are usually given to the people who are having certain income level.

4 – VA Loan

This type of loan is similar to FHA loan only difference is that it’s insured by the US Department of Veterans Affairs. Only veterans can qualify for this type of loans and these are given without a down payment, without private mortgage insurance, and without a second mortgage.

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