This article is about Different Types Of Home Loans. Home loans are loans given to people against their home. Here, in these loans, home is kept as collateral by the lender. They are also called mortgages, a word borrowed from French language. If you are looking for ways to fund your real estate purchase, you will be spilt for purchases. There are numerous financial products in the market and you can pick up any one of them, which suits your purpose.
Let us look at some of the different types of home loan products available in the market,
Fixed rate mortgage means home loans where rate of interest is fixed at certain point, and will not change over the tenure of loan. In this loan agreement, borrower knows the amount he / she will repay each month, for whole tenure of loan.
Usually, the tenure of loan varies from 15 years to 30 years. Borrowers do not have to pay more, if interest rates increase during the tenure of loan. The downside is that if you prepay the loan, that is pay whole amount before tenure of loan, lender may charge you a fixed fee, around 2% of loan amount remaining.
Interest Only Mortgage
In this type of loan, you can pay interest component only for say five years or ten years. Later, once this tenure is over, your loan is amortized as any other loan. Two popular loans of this kind are the 30-year Interest only mortgage and 40 year interest only mortgage. In the 30-year interest only mortgage, first 5 years are just interest payments.
So, on a loan of USD 200,000, you can pay USD 1083 for 5 years and then from the year 6th your loan will be amortized till year 30th, with EMI of USD 1264. As a first home buyer, this interest only repayment helps them adjust to EMI payments. That is why, for first time buyers, this is an excellent home loan product.
Adjustable rate mortgages
In adjustable rate mortgages, rate varies as per the market rate. Lenders can change rate during tenure of home loan. Longer you take to repay the loan, more interest will be charged, thereby increasing cost of loan. Various different types of ARM loans include The Annual ARM, Monthly ARM etc. In the annual ARM, rate changes every year whereas in monthly ARM rate changes every month.
Negative Amortization (Neg. Am) Loan
In this product, borrower can choose to pay lender less interest then accrued on the loan amount. This loan allows borrower to pay full amount, minimum amount or any amount in between. This loan works well, if borrowers income varies all throughout the year. That ways, he / she can repay less amount when income is reduced and pay more, when sufficient funds are available.
In this type of home loan, instead of borrower paying loans to lender, lender pays to borrower. Borrowers can get money either as lump sum, as a monthly sum until borrower is living the house, periodic advances towards line of credit, and a combination of any of these. To qualify, the borrower must be above 62 years of age.
There are few other home loan products available in the market. If you are confused about which one suits your needs, take assistance from the Real Estate Advisor of a Financial Advisor. A good home loans product can make entire experience of buying in new home and living there, far better.