Types of Home Loans

Home loans come in all shapes and sizes and can be customized to accommodate your individual needs. We'll discuss the various types of home mortgage loans on this page.

Traditional Home Loans

Traditional home mortgage loans are intended for people buying a first or second home. These loans usually come with a fixed or adjustable rate. Fixed-rate mortgages retain the same interest rate for the life of the loan, which is usually 15-40 years. If you select a fixed-rate home loan, your interest rates will never change even if market interest rates fluctuate. Fixed-rate loans are ideal when interest rates are low or are expected to spike in the near future.

Adjustable-rate home loans, on the other hand, involve more risk. The interest rate of an adjustable-rate mortgage (ARM) will change according to market conditions. The interest rate will reset, or adjust, every six months to one year. Some borrowers prefer ARMs because the monthly payments and interest rates tend to be lower than fixed-rate mortgages at first. The payments and interest rates associated with an ARM can be hard to predict, but buyers do have some protection from rate caps. ARMs will have limits, or caps, on how much the interest rate can adjust over the course of a year and over the life of the loan.

Equity Home Loans

Home equity loans are designed for people who already own a home but would like to tap into the equity they've accumulated. With an equity home loan, the difference between the value of the home and what the homeowner owes on the mortgage is converted into cash. The borrower can use this cash however he/she sees fit. Home equity loans are popular, low-interest sources of funding for new vehicles, college tuition, home renovations, and other large expenses. Of course, home equity loans can be risky because the home is used as collateral. In other words, if payments are not made as agreed, the bank has the right to foreclose on the home.

Refinancing Home Loans

Refinancing home mortgage loans are also intended for people who have an existing mortgage. Refinancing is a wise option when interest rates have dropped since the original mortgage was borrowed. When a mortgage is refinanced, a new home loan is created in order to pay off the existing mortgage debt. The new loan usually has a lower interest rate and/or better terms. A common derivative of refinancing loans is the cash-out refinancing option, where borrowers refinance their mortgage for a larger amount and receive the difference in a cash loan.