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What are the Different Types of Home Loans?

Autumn Rivers
Autumn Rivers

The sheer number of home loan types available means that there is one that suits nearly every financial situation. One of the main types has fixed interest throughout the life of the loan, and includes 15-year loans, 30-year loans, and balloon mortgage loans. There is also an adjustable-rate mortgage loan, or ARM, in which the interest rate changes throughout the term. An 80/20 loan allows borrowers to avoid putting money down by getting two loans rolled into one, while interest-only home loans require the borrower to pay only the interest for the first few years. These are some of the most popular home loans that are offered to potential homebuyers.

A fixed-rate loan features a permanent interest rate for the life of the loan, so that the homeowner knows the amount that he will be expected to pay. The only way the payment will fluctuate is if the property tax or homeowner's insurance premiums increase or decrease, but the interest rate and principal amount should remain unchanged. Homebuyers can choose between a 30-year loan and a 15-year loan, depending on how long they want the term to be. Of course, the 15-year loan is likely to have payments that are about twice as high as the 30-year loan, but it allows homeowners to save on interest and to own the home outright in half the time. A balloon loan is also fixed, but it usually has a shorter term with lower payments, and is followed by a large lump sum that is due at the end of the term.

Mortgages can be used to purchase residential properties.
Mortgages can be used to purchase residential properties.

Adjustable-rate mortgages, or ARMs, feature an interest rate that changes throughout the life of the loan. These home loans usually feature particularly low rates at first, but they could change with the market at any time, resulting in the homeowner's payment increasing sharply some months. Of course, the payment may also decrease when the rate adjusts down, which is partly why some homebuyers are attracted to this type of loan, though it is a gamble by definition.

Short-term home loans result in higher monthly payments.
Short-term home loans result in higher monthly payments.

Some homebuyers do not have money upfront for a down payment on a home, and do not want to pay the private mortgage insurance, or PMI, that is often required when a down payment is not possible. These homebuyers may opt for 80/20 home loans, which are comprised of two loans that are usually taken from two different lenders. On the other hand, some people wish to decrease their monthly payment at first by opting for interest-only home loans. This type of loan requires homeowners to pay only the interest on the loan at first, but eventually they need to pay the principal, as well. This usually causes the payment to increase over time.

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    • Mortgages can be used to purchase residential properties.
      By: Alterfalter
      Mortgages can be used to purchase residential properties.
    • Short-term home loans result in higher monthly payments.
      By: Andres Rodriguez
      Short-term home loans result in higher monthly payments.
    • Fixed-rate loans have a permanent interest rate.
      By: Photographee.eu
      Fixed-rate loans have a permanent interest rate.
    • Down payment and credit worthiness often determine the terms of a home loan.
      By: Elenathewise
      Down payment and credit worthiness often determine the terms of a home loan.