Buying a home is one of the most expensive purchases that a person will make in his or her lifetime. In order to guarantee that a prospective homeowners will be satisfied with such a large purchase, it is essential that they choose a home loan that has a good fit. Apply online free to contact a home loan expert today.
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Depending on the cost of the home and the borrowers income, there are a variety of loans to choose from. Generally, there are two types of loans: fixed rate loans and adjustable rate loans.
Fixed rate loans have are standard and have a set rate and term that is determined at the start of the loan. This means that the monthly payment of the principal balance and the interest will not change through out the duration of the repayment period. The loans repayment periods usually last 15 to 30 years. Borrowers should be careful to note whether or not their loans include an early payment penalty. An early payment penalty is an out of pocket cost that a homeowner will have to pay if the loan is paid off before the 15 or 30 year mark. If such a clause will be included in the loan, the borrower can adjust the loan period by agreeing up front to make one extra payment a year, which can cut up to 10 years off of the loan repayment period.
Adjustable rate loans, or ARMs, are exactly what their name implies. Adjustable rate loans rise and fall with current market rates as determined by certain indexes, an example index would be the Prime Rate, by which reverse mortgages rates are determined. Loans with adjustable rates are often set up as lines of credit from which a borrower can draw money as if the loan were a credit card. A line of credit would not be appropriate for a first mortgage or another single large purchase, but are much more suited to a series of expenditures. Unlike fixed rate loans repayment, the monthly payments on an adjustable rate loan may vary as market rates change. However, adjustable rate loans have more lenient qualification requirements. This type of home loan has lower initial interest rates and lower initial monthly payments, making it ideal for a prospective homeowner who is uncertain if he or she will remain in the home longer that 5-7 years. Also, if the interest rates fall, a fixed rate loan will reap no benefit, while the adjustable rate loan will drop.