Overwhelmed with the number of different home loan options out there? This list will help you keep them straight.
- Basic Loans. These loans typically offer lower interest than other loans. They have fewer built-in features (they're basic, after all), which means you may have to pay more for them if you decide you want them later. Also, there may be fees for paying off your loan ahead of time or switching to another creditor
- Fixed-Rate Loans. These beauties have smaller-than-average monthly payments that remain the same month after month, so they're especially easy to budget. Interest rates on these loans won't rise with the market, but they won't drop with it either. However, your interest rate only remains fixed for a set period of time (about five years), after which you can renegotiate a new fixed rate—or, you can switch to an adjustable rate loan. These loans are also prone to hefty fees for paying them off early.
- Adjustable-Rate Loans. In some ways the inverse of fixed rate loans, these loans have low interest rates and high monthly payments, so you pay them off quickly and therefore pay less money overall. With these loans, your interest rates vary with the economy, generally rising in response to inflation. If your income is going to grow enough to keep pace with the interest, this may be the loan for you.
- Split Rate Loans. Hybrids are all the rage, right? Split-rate loans are a little bit fixed and a little bit adjustable, so you can do a little bit of gambling. If you think the market is going in your favor (with low interest rates) you can make the majority of your loan adjustable and keep only a little in your favor; if you prefer to play it safe, you can leave only a small percentage of your loan to float with the market.
- Interest-Only Loans. While they may appeal to everyone, these loans are particularly suitable for investors. For a set amount of time, you only have to pay the interest on your loan—none of the principal. While this makes it a little easier to make your payments every month, it means that you'll be paying for longer and ultimately losing money. However, if you have another way to use the money saved, such as a good investment opportunity, these loans may help you squeeze out more capital.
- Line of Credit Loans. Imagine a giant credit card. You're salivating, aren't you? With a line of credit loan, you can borrow against your total loan without being pre-approved. You can spend the money on anything you like, although the amount of money makes it particularly suited to big purchases, like renovations, school tuition, or new properties. Be careful, though; just like credit cards, these loans are a big temptation.
- Low Document Loans. Last, but not least, these loans are especially good for self-employed people or others who for whatever reason cannot show complete financial statements and evidence of income. Definitely shop around if you need this kind of loan; rates and costs vary greatly depending on the provider. Some charge high interest rates at the beginning of the loan period but gradually lower them, while others require mortgage insurance unless you're putting down a twenty-percent down payment.