Types of Home Loans
When it comes to home loans many think only of a loan that helps an individual purchase a home, a mortgage loan. However, in today's financial market there are multiple options for you to choose from when it comes to home loans. In order to know which are the best home loans you should first consider the types of home loans available to you and what each is best used for.The Construction Loan
A construction loan is fairly self explanatory. As the name suggests, these are home loans which are used to finance the construction of a new home. Most of these home loans have short-terms and are typically paid off once construction of the home is complete or when the certificate of occupancy is issued.Since construction loans are standardized they can have various features. However, each construction loan should have a few standard features that you need to be aware of. During the construction period most of these home loans have interest only payments. Most of the loans come with a variable interest rate. Construction loans typically have an interest rate slightly above a short term rate, usually around a prime interest rate. A construction loan typically has a term of six months to a year.
Typically those who get a construction loan choose to get another home loan to pay off the construction loan once it is due. This process requires you to have two mortgage applications with the necessary fees and two closings. Some lenders will make the process easier for you by offering construction-to-permanent loan programs. These programs offer financing during the construction phase and then once the certificate of occupancy is issued switch to a traditional mortgage loan.
Home Equity Loans
Home equity loans are also known as second home loans. These home loans allow the homeowner to borrow money by leveraging the amount of equity in their home. These loans became popular in the late nineties as a way for consumer to avoid the year's tax changes. Home equity loans allow the homeowner to borrow up to a hundred thousand dollars and still deduct all of their interest on the tax returns. These home loans have two varieties to consider.The first is a fixed rate loan which gives the borrower a single, lump-sum payment. Then the borrower has a set period of time at which to repay the amount with an agreed-upon interest rate. Throughout the life of these home loans the payment and interest rate will remain the same.
The second type is a home equity line of credit or HELOC. These are variable rate home loans that work like credit cards and may in fact come with a credit card. The borrower is pre-approved for a specific spending limit and can then take out the money when they need it through a credit card or special checks. The amount of money you borrow and the current interest rate will determine the amount of your monthly payments. These loans have a set term like the fixed rate loans. Once the end of the term arrives the borrower must pay for the total outstanding amount in full.
Home Refinance Loans
When interest rates drop many homeowners rush out to get refinance home loans. This is essentially a new loan that the borrower takes in order to pay off the original loan. Often these are cheap home loans since refinancing allows you to get a lower interest rate or better terms. During the refinance process you can consider changing your loan type as well. For instance, you can change from a fixed rate mortgage to an adjustable rate mortgage. Just make sure you completely understand the terms of the new home loan before switching otherwise you could be getting yourself into bigger financial trouble.Secured Home Loans
These home loans work similar to the standard home mortgage but they have a security against the loan. These loans are excellent for those who need to borrow a large sum of money, if you can't get an unsecured loan or if you have a poor credit rating. With a secured loan the lenders are more flexible. Secured loans can be used to buy a home, build a new home or just make improvements on your existing home.Secured home loans come with their own benefits. They often have lower monthly payment than unsecured loans. You have the ability to borrow a larger sum of money. You can spread your repayment out over a longer period of time. If you have securable assets then you can apply for a secured home loan. These assets are typically property like a home. Even if you don't own your home outright you can use it as security for a secured home loan. Since this security makes the loan secure most lenders will be willing to approve an individual even if they have less than perfect credit history.
