6 Types of Home Loans (And How to Choose the Right One)
Wonder what type of home loan is the best? Well, that depends on your circumstances. But here’s an overview to help you decide.
1. Variable-Rate Home Loans
Variable-rate loans, as their name suggests,
have interest rates that fluctuate with market rates.
Many homeowners choose a variable-rate
home loan because the starting interest rate is often lower than fixed-loan
rates. The mortgage payment amounts also can change over time.
Lenders like variable-rate loans
because fixed loans could carry lower-than-market interest rates for the loan’s
Borrowers like these loans because
interest rates follow the market; they could rise and fall, so there’s a chance
that they could pay less interest.
While there’s more risk for the
borrower, who doesn’t know what their loan rate will be five years from now,
some lenders do set an interest rate cap, upfront, so borrowers know they’ll
never pay more than that amount.
2. Fixed-Rate Loans
Fixed-rate loans have a single interest
rate that borrowers must pay for the entire term of the loan.
A fixed rate is riskier for lenders,
because interest is their incentive to do business, and they could get stuck
with a low rate for the loan’s life. This is why lenders usually prevent you
from paying back a fixed-rate loan early.
Fixed-rate loans offer some stability
because you know that your interest rate will remain the same for the entire
So, while fixed-rate loans often carry
higher interest rates than variable-rate loans, the upside is that your
interest rate will never unexpectedly rise.
3. Interest-Only Loans
Interest-only loans are an option for
real estate investors or people just starting out in their careers.
After the interest-only period, the
borrower pays the amortized principal. So, if the buyer paid interest only for
10 years, they would pay interest and principal for the remaining 20 years.
Or they would repay the loan in its
entirety when they sell the property and (hopefully!) turn a profit.