Those who are thinking about taking out a loan for purchasing a home might thing that there is just one type of mortgage available. Generally one does not hear people discussing about taking out a specific type of mortgage. Although maximum buyers do take out what is referred to as a fixed rate mortgage, the fact is that there are a number of different types of mortgages available. When it comes to selecting the type of loan that is right for you having additional knowledge about these types of mortgages and their positives and negatives is a must. Here’s a look at a few of the other types of mortgage loans that are available.
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. These loans are quite lucrative for mortgage brokers because of their extremely high fees and interest rates. Since the borrower does not have to provide any proof that he or she can actually repay the loan, these are very risky loans to make. 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 mainly intended for those who are not planning to reside in the home for very long, as the intention is to sell the home before the lump sum comes due so the borrower has the money needed to pay the loan off. Obviously, the borrower will not build equity with this type of loan unless home prices increase significantly in the area after making the purchase. Although this type of loan may sound pretty nice because of the low monthly payments, 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.
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%. This method permits you to take the full amount as loan with the smaller loan being use as the down payment. As a result, you may actually find yourself owing more on the home than it is worth if the value of the home drops.
A loan with a variable interest rate that changes according to current interest rates is known as n ARM or Adjustable Rate Mortgage loan. 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. While there are some potential benefits associated with these types of loans, they all come with risks as well. People choose to go with the traditional fixed rate mortgage in order to avoid these risks and it is not tough to fathom why.
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