Types of Real Estate Loans
August 10, 2009
Types of Real Estate Loans
There are various types of real estate loans available in the market, such as:
A conventional or a traditional loan is basically a loan which is offered by all private lenders, and can be of a fixed-rate or an adjustable rate. Although these loans are offered by all the lenders and have a comparatively less paper work to do, these loans are a little harder to obtain or qualify for and also do not have any fixed maximum allowable loan amount.
Just as the name suggests, a fixed-rate loan is the one that comes with a fixed interest rate for the total loan term. Conventionally, fixed-rate loans have been quiet popular with homeowners as it is easier to plan out your future budget keeping in mind a steady monthly installment and also helps to manage the budget accordingly.
Fixed-rate loans are usually taken up for loan duration ranging from 15 to 30 years. The broader the loan term, the lower are the monthly payments, but a little higher is the interest rate.
Adjustable rate loans
Adjustable rate loans are somewhat opposite from fixed rate loans as with them, the rate of interest can change during the loan term. This means that the monthly payment can also alter over the life of the loan. This is because the interest rate for an adjustable rate loan is adjusted from time to time based on any of the pre-selected indicators or market conditions
With caps to limit the rate from rising steeply, a certain boundary is set such as from 2 percent to no more than 6 percent. With such securities and low initial interest rates, adjustable rate loans have become the next best option to fixed-rate loans.
Hybrid loans can be known as a combination of the above mentioned two loans- the fixed rate loans and the adjustable rate loans. Such a loan starts with a fixed rate of interest which goes on for a specified period of time, just like the fixed rate loans, which later gets converted into an adjustable rate loan. However, always make sure that your hybrid loans have interest rate caps for the first adjustment period and to keep a check on how much rate increases after conversion.
A balloon loan can be known as the one in which a borrower has to pay back only the interest payments for the entire span of loan term. And the remaining loan amount is then paid back in bulk by the borrower to the lender at the end of the loan term.
These types of loans can be an attractive option for those homeowners who do not plan to live in their house for a longer period of time. These types of loans also allow you to decrease your monthly payments.
FHA and VA loans
These are government backed loan programs such as the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA). FHA and VA loans are available only for the veterans and their spouses along with certain government employees. Such programs are basically designed to encourage home ownership especially for the people who can otherwise not be eligible for a conventional loan.
Although these loans are not issued by the government and have to be obtained by the private lenders only, such loans mostly have lower monthly payments to them.
Also, the private lenders are insured by the U.S. government in case the borrowers fail to pay them back.