Many types of loans are available to consumers. It can be confusing to know which option is best for you. In this blog post, we will discuss amortized and interest-only payment schedules, and the benefits of each. We’ll also explore alternative mortgage loan options. So, whether you are looking to buy a home, refinance your current mortgage, or just get a better understanding of the types of loans out there, read on for information on the different types of loans available to you.
Types of loans
Fixed-rate mortgage
A fixed-rate mortgage has a set interest rate that does not change for the life of the loan. This type of mortgage is ideal for those who want predictability and stability in their monthly payments.
Adjustable-rate mortgage
An adjustable-rate mortgage (ARM) has an interest rate that can change at any time, based on the current market conditions. This type of mortgage is ideal for those who are comfortable with some risk and want to take advantage of potential savings if interest rates go down.
There are also several subtypes of ARMs, including:
- Hybrid ARM. A hybrid ARM has an interest rate that is fixed for a certain period of time, after which it becomes adjustable.
- Balloon mortgage. A balloon mortgage has a very low-interest rate for the first few years, followed by a much higher interest rate at the end of the loan term. This type of mortgage is ideal for those who plan to sell their home within a few years.
- Interest-only mortgage. An interest-only mortgage allows you to pay only the interest on your loan for a certain period of time, usually five to 10 years. After that, the principal becomes due and must be paid back in full. This type of mortgage is ideal for those who want to keep their monthly payments low but are comfortable with the risk that their principal balance will increase over time.
Amortized vs. interest-only payment schedules
What is an amortized loan?
An amortized loan is a type of mortgage in which the principal and interest are repaid over a fixed period of time. This repayment schedule is determined when you take out the loan, and it cannot be changed. The amortization period typically lasts between 15 and 30 years, but it varies depending on the lender. During this time, your monthly payment will remain constant, even if the interest rate changes. This makes amortized loans a good choice for borrowers who want predictable monthly payments.
What is an interest-only payment schedule?
Interest-only payment schedules are becoming increasingly popular among homeowners. With this type of loan, you only pay interest on the outstanding balance of your mortgage each month. The principle remains unchanged, so your total payments will be lower than if you had an amortized loan. However, your total interest payments will be higher, and the principal balance of your mortgage will increase over time.
With this type of payment schedule, you can keep your monthly payments low. It can be helpful for those who are expecting a large expense in the near future, as it gives them more breathing room in their monthly budget. It is also a solid option for those who have plans to move or refinance within a few years.
Alternative mortgage loan options
FHA loans
FHA loans are mortgages that are backed by the Federal Housing Administration (FHA). This means that the government guarantees that FHA-approved lenders will be repaid if you default on your loan.
Because of this guarantee, FHA loans are often easier to qualify for than other types of mortgages. In addition, FHA loans come with a variety of features, including:
- Low down payment requirements.
- Flexible credit requirements.
- Options to use gift funds for a down payment.
VA Loans
VA loans are mortgages that are backed by the Department of Veterans Affairs (VA). This means that the government guarantees that VA-approved lenders will be repaid if you default on your loan.
VA loans come with a variety of features, including:
- No down payment required.
- Flexible credit requirements.
- Options to use gift funds for a down payment.
USDA Rural Development Loans
USDA Rural Development Loans are mortgages that are backed by the United States Department of Agriculture (USDA). This means that the government guarantees that USDA-approved lenders will be repaid if you default on your loan.
USDA Rural Development Loans come with a variety of features, including:
- No down payment required.
- Flexible credit requirements.
- Options to use gift funds for a down payment.
Conventional mortgage loan options
Conventional loans are mortgages that are not backed by the federal government. This means that there is no guarantee from the government that these lenders will be repaid if you default on your loan. However, this also means that conventional loans typically have lower interest rates and more flexible terms than other types of mortgages.
When it comes to conventional loans, there are two types: fixed-rate and adjustable-rate. With a fixed-rate loan, your interest rate will stay the same for the entire duration of your loan. This can be helpful for those who want predictability in their monthly payments. With an adjustable-rate loan, your interest rate can change throughout the life of the loan. Aside from a traditional mortgage, here are additional loans available to you:
Home equity loans
A home equity loan is a type of loan that uses the equity in your home as collateral. This means that you are borrowing against the value of your home to get money for other purposes, such as home improvements or debt consolidation.
One thing to note about home equity loans is that they typically come with higher interest rates than other types of loans. However, this may be worth it if you can get a lower interest rate on your credit card or other debts.
Personal loans
A personal loan is a type of unsecured loan that can be used for any purpose. This means that you do not have to use the money for something specific, like buying a car or refinancing your mortgage.
Personal loans typically come with lower interest rates than credit cards, but they also have shorter terms. This means that you will need to pay back the loan in a shorter amount of time.
Loan refinancing
Refinancing is the process of taking out a new loan to pay off an existing loan. This can be helpful if you are able to get a lower interest rate on your new loan, as it means that more of your monthly payment will go toward paying down the principal balance instead of going toward paying interest charges.
Bridge loans
Bridge loans are a type of short-term loan that can be used to cover the gap between the purchase of a new home and the sale of your old home. This can be helpful if you need money to move before your old home is sold. Bridge loans typically have high-interest rates, but they can help you get into your new home sooner.
Cash-out refinance loans
A cash-out refinance loan is a type of refinancing that allows you to get extra money from your home equity. With this type of loan, you can pay off your old mortgage and take out additional funds at the same time. This can be helpful if you need money for things like home improvements or debt consolidation.
Reverse mortgages
A reverse mortgage is a type of loan that allows homeowners aged 62 and older to convert the equity in their home into cash. Homeowners can use this cash for things like paying off their current mortgage, making repairs on their home, or covering medical expenses.
Different types of lenders
Direct lenders
A direct lender is a company that offers loans directly to consumers. This means that you can apply for the loan at their website or office and get approved without having to go through another company.
Mortgage brokers
A mortgage broker is a company that helps you find the best mortgage for your needs. They work with a variety of different lenders, and they can help you get approved for a loan even if you have bad credit or are self-employed. Some popular mortgage brokers include most banks, credit unions, Fannie Mae, and Freddie Mac.
Correspondent lenders
A correspondent lender is a company that originates loans but then sells them to another business. This can be helpful if you are looking for a specific type of loan or want to work with a certain lender. Some examples of popular correspondent lenders include the FHA, the VA, and the USDA.
Final thoughts
When it comes to choosing a loan, it is important to consider your needs and goals. Do you want a low monthly payment? Or are you more interested in locking in a fixed interest rate?
Also, think about how long you plan on staying in your home. If you think you will sell or refinance within the next few years, an adjustable-rate mortgage may be a good option for you. However, if you plan on living in your home for many years, a fixed-rate mortgage may be the better choice. There are many different options available and the one you choose depends on your goal.
