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Types of Loans
There are numerous types of real estate loans. Some of the more common types are listed below. There are many more. If you are in an unusual financial situation and are uncertain if you are in a position to buy a home, you may want to shop around for a lender that has a loan program available to help you. Many real estate agents will also be aware of loan programs that can help buyers in different situations, and may know which lender is best suited to your needs. Because many types of loans are similar, a borrower should consult with a loan officer to fully understand the advantages and disadvantages of each loan. To view the three main categories of loans, click here.
Amortized Loan
A loan where the payment addresses the interest owed, plus something towards the principal (the money you borrowed). If the loan is Fully Amortized, the borrower will pay enough towards the principal with every payment, so that the loan will be fully paid off by the end of the loan term.
Balloon Loan
A loan that is only partially amortized, meaning the borrower is paying something towards the principal, but not enough to pay off the loan by the end of the loan term. This will allow the borrower to make lower payments throughout the life of the loan, but will require one large payment at the end. The homebuyer should be prepared to either make the large payment, or refinance with a normal amortized loan at some point before the end of the original loan term, either when their financial situation or interest rates have improved.
Buydown
A loan in which the buyer pays additional money up front (or the seller pays on behalf of the buyer), which buys down the interest rate in the beginning part of a loan. The most common is a 2/1 Buydown. This would lower the interest rate 2% for the first year, 1% the second year, and then the buyer would pay the normal interest rate for the remainder of the loan term. This can be a possible option for someone who knows that their income will be increasing over the next few years. Other options would include an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM).
Are You Qualified To Buy?
Financing Options
All About FHA Loans
The Loan Process
Financing Vocabulary
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George Kuda - Prosperity Mortgage
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©2003 Douglas R. Barry