Understanding The Various Types Of Mortgage Loans Before You Shop For A House

Posted on: 29 December 2015


Buying a home can be an exciting experience. However, when you are not sure about which type of home loan would be the best fit for your budget, the home buying experience can also be confusing. Taking the time to learn more about what home loans are about and which one would suit your budget is important before visiting lenders and shopping for houses.

Consider How You Want To Pay Interest

How you pay the interest rates on your loan determines the kind of loan you have. How fast you would like to pay off your home loan is another determining factor related to interest rates and the kind of loan you have. The following are the most common types of loans you might find are suitable for your budget:

  • Fixed Rate: A fixed rate loan allows you to pay down the principal while also paying interest in each payment. Most fixed rate loans are made for 30-year terms, but you can also choose 10, 15, 20 and 25 year terms, depending on how fast you want to pay off your loan and how much you want your payments to be each month. The longer your term is, the lower your payments will be each month. A fixed rate loan also guarantees you stay at and pay the same amount of interest throughout the entire loan. However, keep in mind that when extend your loan to 30 years, you will also be paying more interest in the long run.
  • Adjustable Rate: An adjustable rate loan is generally made for 30 years but with a fixed rate on interest for a set time period. Once the set time period is up, the interest rates on your loan will fluctuate as interest rates in the market go up and down. While this could be a good way to save when the interest rates drop extremely low, you should always consider what you will be spending in payments each month when the rates are at their highest.
  • Simple Interest Vs. Compound Interest: A simple interest loan is a popular choice because it just that: simple. Simple interest is not compounded and is charged only once during your loan. For example, if you borrow $1,000 using a simple loan structure, you would pay back a set amount of $100 if the simple interest rate was set at 10 percent. Compounded interest on a loan is more expensive because it is figured against the interest accrued in addition to the principal amount owed, meaning you would have to pay over the amount of payments to decrease the principal like you could in other types of loans.

When you start looking for your new house, being informed about the various types of loan options you have available can make it a lot more enjoyable and easier to figure out. Discuss with your lender about which home loan would be your best option and learn whether or not you will qualify before you start shopping for a home.