Types of loans
When approaching the closing stages of a home or
property purchase, a broad understanding of the financing process can help
inform a more effective financing process. Each unique type of loan or
financing structure will determine the costs, timing and nature of the mortgage
itself. Independent of the terms of the loan itself, buyers should fully take
into account the financing process itself with close attention to fixed,
adjustable and hybrid loans which cater to the budget process for each type of
buyer. Rather than allowing choices to be overwhelming, each buyer’s unique
needs are property represented in the terms of the real estate loan. Opening up
more options for financing a property can lower the overall costs of ownership
and help you to structure long-term plans in your own personal interest.
In addition to selecting the ideal property for your next investment, the exact type of mortgage structure will impact your ability to get a solid long-run return on your property investment. The most common form of mortgage is a fixed-rate, standard mortgage which has a fixed term and interest rate for the life of the loan. With standardized payments and 15, 20, 30 or 40-year terms these loans make it easier to budget and plan for financing. Preferred by many borrowers for their fixed structure, fixed-rate loans make it much easier to plan ahead for how to pay for a home loan property over time.
While adjustable or variable-rate (ARM) mortgage were previously a preferred source for many borrowers because they have generally lower down payment requirements. By contrast, however, the interest payments on the loan are indexed against a benchmark of lending costs, which can vary widely depending on the costs of borrowing. As a result, when the lending market tightens it can be more difficult to obtain a loan on good terms, resulting in increasing mortgage rates over time. When credit markets become tighter, interest rates on these loans can increase rapidly, although some of the loans have limits on the increases between each period – still, borrowers incur risks with variable-interest rate loans above and beyond those of fixed structure mortgages.
There are also hybrid loans which convert from a fixed to a variable-rate mortgage over time, often with a buyer option to revert to a fixed-loan after a certain amount of time. Depending on your time frame of remaining within the property, a hybrid loan may be ideal for those who are only in the home for a shorter amount of time since it offers down payment advantages over strictly fixed loans. Keep in mind that balloon payments may accrue to loans toward the end of the lending cycle, so you should plan out your payment schedule over a large period of time to take into account shifts in what you actually owe including taxes, property fees and home ownership costs.
ShareThis