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Exploring your mortgage loan options

Exploring Your Mortgage Loan Options

If you are planning to take out a loan in order to purchase a home, you may think there is only one type of mortgage available. After all, you generally don’t hear people talking about taking out a specific type of mortgage. Although the majority of buyers do take out what is referred to as a fixed rate mortgage, the reality is that there are several different types of mortgages available. Understanding these types of mortgages and the pros and cons they offer is essential when it comes to selecting the type of loan that is right for you. Here’s a look at a few of the other types of mortgage loans that are available.

Alternative-A Loans

Also referred to as simply Alt-A loans, liar loans or NINJA (No Income, No Job and No Assets) loans, these loans are given out without requiring the buyer to meet many requirements. As might be expected, these loans come with very high interest rates and fees, which makes them quite lucrative for mortgage brokers. At the same time, these are very risky loans to make since the borrower does not have to provide any proof that he or she can actually repay the loan. It is also not a good choice for you because of the high fees and interest rates that are associated with the loan.

Balloon Loan

With a balloon loan, you only pay the interest fees for the first 5 to 10 years. After this period of time is over, you have to pay off the loan balance in one lump sum. This type of loan is primarily meant for those who do not plan to stay in the home for very long, as the intent is to sell the home before the lump sum comes due so the borrower has the money needed to pay the loan off. Obviously, the borrower will not build equity with this type of loan unless home prices increase significantly in the area after making the purchase. Although this type of loan may sound pretty nice because of the low monthly payments, a person who takes out a balloon loan can be in a very difficult situation if the value of the home goes down when it is time to sell.

Piggyback Loan

Another option is to take out a loan that covers 80% of the purchase price of the home as well as another loan that covers the other 20%. The smaller loan is then used as the down payment, which means you are actually borrowing the full amount of the loan.  As a result, you may actually find yourself owing more on the home than it is worth if the value of the home drops.

Adjustable Rate Mortgage

An Adjustable Rate Mortgage, or ARM loan, is loan with a variable interest rate that changes according to current interest rates. When interest rate are down, this can translate into a substantial savings for borrowers when compared to those with fixed rate loans. When the rates go up, however, borrowers with an ARM loan may face a significant increase in their monthly payments that may be difficult to pay.

These are just a few of the options available to you. While there are some potential benefits associated with these types of loans, they all come with risks as well. Therefore, it is easy to see why so many choose to go with the traditional fixed rate mortgage in order to avoid these risks.

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