If you’re planning on purchasing your first home in 2016, it’s time to explore the basics of home financing. Home financing is one of the first steps on the road to home ownership and you’ll need to figure out which type is the best fit for you.
Here is a brief run-down of the common types of loans available and what each entails.
Conventional loans are home financing loans from mortgage lending organizations that aren’t supported by a government agency. This type of mortgage loan can be either conforming or non-conforming.
A conforming loan follows the guidelines set out by Fannie Mae and Freddie Mac. These guidelines govern factors such as the maximum loan amount, the mortgagor’s debt-to-income ratio, the loan-to-value ratio and credit history. Conforming loans are appealing to borrowers because they generally involve lower interest rates.
As the name implies, a non-conforming loan does not comply with the guidelines laid out by Fannie Mae and Freddie Mac. This type of loan is offered to borrowers unable to qualify for conforming loans and normally has higher interest rates. Non-conforming loans may also have additional upfront fees and insurance requirements.
The best-known type of non-conforming loan is the jumbo loan; a loan that is too large to meet the guidelines of a conforming loan.
With a secured loan, otherwise known as a collateral loan, you leverage personal property to acquire the home financing. If you default, the property is conveyed to the lender. Secured loans could be a good choice if you have personal assets such as equity in your home, car, or savings account that can be used as security. The loan amount and interest rate will be determined, in part, by the value of the property being leveraged.
Other benefits of secured loans may be lower interest rates, larger loan amounts, or better terms than unsecured loans, although factors, like loan length and credit history, will also be taken into consideration.
Unsecured loans are based on your credit history and income and this determines the interest rate and size of the loan. If you have a good income, excellent credit and a rock-solid payback plan, an unsecured loan may be a good choice for your home financing. Unsecured loans are also known as personal or signature loans.
Open-ended loans are loans with a fixed-limit line of credit that can be borrowed from again after they have been repaid. Credit cards and other revolving credit accounts are considered open-ended.
A home equity line of credit known as a HELOC is another type of open ended loan where the lender agrees to an amount of credit based on your home’s appraised value, minus any mortgage balance. The sum acts as a credit line you can use, pay back and use again. This is considered an open-ended loan, although it is secured by the value of your home and might carry a lower general interest rate.
Closed-ended loans are loans that cannot be borrowed from again, like mortgages for home financing or a vehicle loan. The loan decreases with each payment. If you want more credit, you have to apply for a new loan. These loans have a definitive balance, term and payment amount. They are generally used to secure big-ticket items such as vehicles and homes, and often have interest rates that are more favorable than those of open-ended loans. A closed-ended personal loan is sometimes used for student loans or debt consolidation.
Of the many home financing products available, there’ll be one to fit your needs. The professionals are there to help you determine which type of loan is best for you and your budget.