Understanding Different Loan Types

Because there are many different types of loans, it is important to understand the differences before attempting to secure a home loan. From fixed and adjustable-rate loans to jumbo and conforming loans, there are plenty of options available for buyers in a variety of situations.

Fixed and Adjustable-Rate Loans

The first thing that loan seekers must understand is the difference between fixed and adjustable-rate loans; simply put, it is determined by the interest rate. While a fixed interest rate remains the same throughout the life of the loan, an adjustable-rate fluctuates throughout the repayment period of the loan.

Conventional and Government-Insured Loans

A conventional loan differentiates from a government-insured loan in that it is not in any way backed by the Federal Government. Those loans that are guaranteed by the government typically fall into three categories, which include FHA loans, VA loans and USDA loans; these are available to all types of borrowers, service members and their families and rural borrowers who meet specific income qualifications, respectively. It is vitally important to understand the differences between each type of government-insured loan before attempting to apply for any of them.

Substandard and Standard Loans

A substandard loan is more of a distinction than an actual loan type; the easiest way to understand it is to remember that substandard loans are those on which the lender is likely to lose money; however, lenders usually agree to substandard loans because their losses are usually in interest, not principal. The opposite is true of a standard loan; lenders are typically confident that they will receive the loan’s principal and all of the required interest in payments.

Conforming and Jumbo Loans

Conforming loans are those that meet the income qualifications and size limits established by Fannie Mae or Freddie Mac, the two government-operated businesses that buy and sell loans on Wall Street. Because jumbo loans differ from conforming loans in terms of size and the income of the borrower, those seeking one are generally required to have a larger-than-average down payment, excellent credit and are likely to see higher interest rates throughout the life of the loan.

Compare Carefully Before Borrowing

One of the most important factors that future home owners must consider before borrowing is the type of loan that they will be taking out. By understanding the types of loans available, borrowers can choose the best option for themselves.