Buying a home is an exciting start to a new chapter in your life. You are able to settle down and start a family, or at least attach yourself permanently to one place.
However, buying a home is also a complicated financial commitment. You likely do not have the funds to pay for your home completely in cash. That’s why you need to take out a home loan to finance your purchase, but not all home loans work in the same way.
Keep reading for a complete overview of the types of housing loans that are available to you as a homeowner.
1. Variable-Rate Home Loans
Variable-rate loans are by far the most common type of loans available to homeowners. As their name would suggest, they have interest rates that can switch month to month. This means that they are of lower risk to banks and lenders.
The reason why most homeowners choose a variable rate home loan is that the rate is usually cheaper than the alternatives since they represent a lower risk to lenders. A variable rate loan also usually comes with the freedom to pay back the loan at an increased rate, so you don’t have to hold onto the debt for a fixed term.
2. Fixed-Rate Loans
Fixed-rate loans, on the other hand, have a single rate that you will pay for the entire term of the loan. That rate is slightly riskier for lenders, which is why they usually have provisions that prevent you from paying back the loan early. Fixed-rate loans give you a degree of stability because you know that your payment will remain the same for the entire term.
However, fixed-rate loans also usually come at a higher interest rate than you could enjoy with a variable rate loan. Of course, this is offset by the fact that your interest rate will never rise unexpectedly one month.
3. Interest-Only Loans
Interest-only loans are an option for real estate investors, as well as people just starting out in their careers. For a fixed period, usually seven to ten years, you only pay the interest on your loan, not the principle. This lets you put money towards improving the home so you can flip it later.
You’ll repay the loan in its entirety when you sell the property and turn a profit, or later on in your career when you can afford the monthly payments.
4. Low Documentation Loans
Low documentation loans, sometimes also called no documentation loans, are loans that are available to people who do not have traditional employment. Business owners and freelancers who earn self-employment income can apply for these loans using their bank records and other financial statements instead of pay stubs.
Credit scores, the size of the down payment, and proof of funds play a larger role in determining if you can get a low documentation loan. Because of the perceived higher risk, low documentation loans will usually come with a higher interest rate than traditional variable or fixed-rate loans.
However, these loans are for people who can afford loan payments and have the money for a downpayment ready. Home loans for doctors, for example, can fall under this classification if they own their own practice.
5. Home Line of Credit
If you already bought your home, or own it outright, you can apply for a home line of credit. Also known as home equity loans, these let you borrow against the value of your home, which you can then use to renovate or improve your house.
The amount you can borrow depends on how much your home is worth, as well as how much you have still owing on it. You can also use that money for other projects and purchases in your life. Rates are usually variable.
If you still owe money on your original home loan, you will have an accelerated repayment schedule so that you will repay the full amount by the originally agreed-upon date. For example, if you took out a $100,000 in a fixed-rate loan, paid off $75,000, and then took out a home line of credit for $25,000, you would have to pay back the $50,000 plus interest by the end date of the original $100,000 loan.
6. Non-Conforming Loans
A non-conforming loan is a type of home loan that is designed for people with low credit ratings and the inability to get traditional home loans. They are similar to low documentation loans, in that those who apply for them usually do not have employment records to gain access to funding.
However, non-conforming loans usually are usually for people who cannot pay a downpayment upfront.
Since they’re aimed at lower-income borrowers, they tend to have the highest interest rates of every home loan. If you are going to apply to a non-conforming loan, you need to make sure that you’re able to handle the interest payments.
Make sure that you are borrowing from a reputable lender when looking for a non-conforming loan. Also, be sure to check what local regulations say is the legal maximum you can be charged in interest. Some predatory lenders can charge excessive rates that are almost impossible to keep pace with.
Compare Lenders for the Best Rate
Now that you know the six major types of housing loans on the market, you can pick the one that best fits your employment and financial situation. Always take care to get quotes from several lenders. You want to make sure that you are getting the best rate possible, which can save you hundreds or thousands of dollars over the years.
For more information about real estate and homeownership, check out the rest of our blog!