If you are planning to take out a loan in order to purchase a home, you may think there is only one type of mortgage available. You generally don’t hear people talking about taking out a specific type of mortgage, do you? Although the majority of buyers do take out what is referred to as a fixed rate mortgage, the reality is that there are several different types of mortgages available. 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. The details of a few of the other types of mortgage loans that are available are provided below.
Also known as NINJA (No Income, No Job and No Assets) or liar loans, or Alt-A loans, these loans are given out without requiring the buyer to meet many requirements. Expectedly, these loans come with extremely high fees and interest rates, which make them quite rewarding for mortgage brokers. Making these loans are quite risky since the borrower does not have to provide any proof that he or she can actually repay the same. These loans are not ideal for you because of their high fees and interest rates that are associated with it.
When opting in for a balloon loan, you only pay the interest fees for the first 5 to 10 years. You have to pay off the loan balance in one lump sum after this period of time is over. This type of loan is primarily meant for those who do not plan to stay in the home for very long, as the intent 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 purchase, it is obvious that the borrower will not build equity with this type of loan. A person who takes out a balloon loan can be in a very difficult situation if the value of the home goes down when it is time to sell despite the fact that this type of loan may sound pretty nice because of the low monthly payments.
There is yet another option whereby one takes out a loan that covers 80% of the purchase value 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 actually borrowing the full amount of the loan. Due to this, you may actually find yourself owing more on the home than it is worth if the value of the home drops.
An ARM or Adjustable Rate Mortgage loan is loan with a variable interest rate that changes according to current interest rates. When interest rates are lower, this can interpret into a considerable savings for borrowers when compared to those with fixed rate loans. However, when the interest rates go up, borrowers with an ARM loan may face a significant increase in their monthly payments that may be difficult to pay.
There are other options available to you too. Despite the potential benefits associated with these types of loans, they all come with risks as well. It is therefore easy to see why so many choose to go with the traditional fixed rate mortgage in order to avoid these risks.
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