You may reckon there is only one type of mortgage available, if you are plotting to take out a loan in order to buy a home. You generally don’t hear people talking about taking out a specific type of mortgage, do you? The reality is that there are several different types of mortgages available, though the majority of buyers do take out what is referred to as a fixed rate mortgage. Knowing more about these types of mortgages and their positives and negatives is a must when it comes to selecting the type of loan that is right for you. Here’s a look at a few of the other types of mortgage loans that are available.
Loans like NINJA (No Income, No Job and No Assets) or liar loans, or Alt-A loans are given out without needing the purchaser to meet many requirements. As might be expected, these loans come with very high interest rates and fees, which make them quite lucrative for mortgage brokers. Making these loans are quite risky since the borrower does not have to provide any proof that he or she can really repay the same. These loans are not ideal for you because of their high fees and interest rates that are associated with it.
With a balloon loan, you only pay the interest fees for the first 5 to 10 years. At the end of this period, you have to pay off the loan balance in one lump sum. This type of loan is mainly intended for those who are not plotting to reside in the home for very long, as the intention is to sell the home before the lump sum comes due so the borrower has the money needed to pay the loan off. Unless home prices increase significantly in the area after making the buy, it is obvious that the borrower will not build equity with this type of loan. Although this type of loan may sound pretty nice because of the low monthly payments, a person who takes out a balloon loan can be in a very hard situation if the value of the home goes down when it is time to sell.
Another option is to take out a loan that covers 80% of the buy price of the home as well as another loan that covers the other 20%. The smaller loan is then used as the down payment, which means you are really borrowing the full amount of the loan. Due to this, you may really find yourself owing more on the home than it is worth if the value of the home drops.
An Adjustable Rate Mortgage, or ARM loan, is loan with a variable interest rate that changes according to current interest rates. When interest rates are down, this can translate into a substantial savings for borrowers when compared to those with fixed rate loans. But, when the interest rates go up, borrowers with an ARM loan may face a significant increase in their monthly payments that may be hard to pay.
These are just a few of the options available to you. While there are some potential benefits associated with these types of loans, they all come with risks as well. Therefore, it is simple to see why so many choose to go with the traditional fixed rate mortgage in order to avoid these risks.