Because everyone’s situation is different, it can be difficult to recommend one loan for all homeowners. What might be a good fit for one person may be a disaster for another. Important factors to consider include a person’s income level, credit history, job and tolerance to risk. Although as we alluded to above, no single loan will necessarily be right for every person, there a few loans that homeowners tend to gravitate to. We will take a look at some of these below.
Traditional Loan: A traditional loan is a fixed rate loan. A person agrees to pay back the loan within a predetermined amount of time. This type of loan is considered to be quite safe. Individuals know exactly how much their mortgage payment will be every month. There is never a question. For this reason, this type of loan is very popular amongst people who tend to be adverse to risk. There are some disadvantages associated with traditional loans. For instance, individuals aren’t able to take advantage of lower rates. They are locked in to the agreed upon rate unless they manage to re-finance their home.
Interest Only: An interest-only loan is one in which the borrower only pays the interest on the loan, for a set amount of time.. After this time has passed, the borrower must pay both the loan’s principle and the interest. The mortgage payments will increase but only after the borrower has gotten to enjoy a period of pretty affordable payments.
Variable Rate Loan: A variable rate loan is best for those that are willing to assume a little more risk. The interest rate for this type of loan can swing pretty wildly. It can be up one month and then down the next. Homeowners purchase homes with this type of loan because they enjoy the really low interest rates this type of loan offers, even if it is only temporarily.
There you have it, three loan options for prospective home buyers. Traditional, interest only and variable rate are amongst the most common mortgage loans on the market and for good reason. They offer borrowers a ton of benefit, though in different ways.