There are a lot of types of loans out there. It may seem that everyone is trying to advertise this or another type of loan to you.The main thing is, you don’t know what type of loan you really need until you know what you’re going to use the money for. A mortgage is going to be too much if you just need to make it until the next paycheck and a small business loan isn’t going to really be suited for you to pay off your car. All of these loans are different because the people trying to get them are different, the risks are different and the length and capital needed for the loans are all very different.
Mortgages or Home Loans
Mortgages are one of the most popular types of loans and they come in a number of different varieties. The number of people that can buy a home with the amount of money in their bank account is pretty much nonexistent, and those that want to are even less of a population. Even for those that have the kind of money to pay for a house outright, even if it takes only a few months to get the money together, they are going to want the security of a mortgage. Not many want to put a purchase like a house or an apartment onto their credit card (regardless of the points you might get from that).
Fixed Vs. Adjustable
There are fixed and adjustable rates for home loans and the size and length of the loan can of course vary a great deal. A fixed rate loan means that for whatever the duration of your loan, the interest rate is locked at whatever it was when you signed the loan. An adjustable rate means that for a set term the interest rate typically remains fixed, but after that the interest will fluctuate, usually changing about every year.
A fixed rate loan is the typical choice for home buyers and is the more recommended route. The interest rate may initially be higher, but the certainty of the rate for the life of the loan means that through dips in the market and your own personal finances, you will always know what you need to pay at the end of the month. While it may be a tight payment near the beginning of your career, as things hopefully progress the payment will seem smaller and more manageable. It won’t ever be changing and can be budgeted for in a long term plan.
An adjustable rate loan, on the other hand, is the riskier way to go. Certain things can affect the rate after the initial period, and not being able to fully predict the change to your rate can be a poor financial decision. Adjustable loans with a longer initial period typically have a less advantageous rate, but of course offer your security in that rate for a longer time. There is a chance of course that you can hit things right and your rate will actually go down when your initial rate is up, but the odds are typically against you and the uncertainty can be tough to plan for.
The main people who choose to go with an adjustable rate are those who plan not to stay in a home for too long. If you plan to sell and leave before the initial lower rate expires then the adjustable mortgage rate can be a great way to minimize expenses. The only real problem that could occur is a large drop in the home’s value. This would mean that when you try and resell the property you would not be able to pay off the loan in full and so might get stuck paying the mortgage at a higher rate even though you are no longer living there.
Fixed loans versus adjustable loans is just one decision you need to make when it comes to your home mortgage. There are many other factors when it comes to your home loan that differentiate one option from another, and getting to know which is best for you is a big part of getting ready to purchase a home.