Types of Loans Available on the Market

There are a number of loan products on the market today, and for first-time or inexperienced home buyers the options can be somewhat overwhelming. There are loans designed specially for first-time homeowners, loans for short-term or long-term borrowing, loans for investing, loans for primary residence and so on. However, it really isn’t as complicated as it may seem. As long as you are familiar with the basic loan types and keep their best uses in mind, you should have no problem finding a good fit for your borrowing situation.

Essentially, there are two main types of mortgage loans that you need to be familiar with. There are fixed-rate mortgages in which the interest stays the same for the duration of the loan, and variable-rate loans where the interest rate changes. Fixed-rate loans often start out at a significantly higher interest rate than variable-rate loans, but the latter can fluctuate widely after an initial introductory period. Obviously, fixed-rate loans are the most secure even if it may cost a little more. However, each of these loan types have their specific uses. Using the wrong loan type for your mortgage could result in serious issues with your ability to make the payment on the loan.

The main thing to remember is that fixed-rate loans are ideal for long-term borrowing, such as when you’re purchasing a primary residence that you plan to stay in indefinitely. Many people also refinance with fixed-rate loans after the introductory interest rate on a variable-rate loan is no longer in effect. Variable-rate loans are a great option for short-term borrowing that does not extend beyond the introductory period. Past this, there is nothing to keep the rate from going to a pre-determined cap rate which can add up to the equivalent of buying a house on a credit card. Often, lenders will encourage unwary borrowers to take a variable-rate loan with the low introductory as its selling point, but this has led to issues all over the country as buyers realize they can no longer afford their houses once the introductory period is over.

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