Different Types of Home Loans


We list below a brief explanation of each of the more common types of home loans available to home owners and home buyers. Before you go to one of the sites like wikianswers or Yahoo! Answers (and sorting through a dozen spam comments) give this page a quick look as most likely you’ll find your answers here.MortgagesThere are a dozen different types of mortgages, but in the interest of simplicity, we’ll just explain the basic idea behind a mortgage which is that you take out a loan using the home you intend to buy as collateral against the loan. If you fail to make payments, the lender will ultimately have the right to your home and can foreclose or sell it. Mortgages do come with interest rates, like any other loan.Subprime LendingSubprime lending refers to a lender providing credit to borrowers who don’t yet meet prime underwriting guidelines. Subprime borrows have a higher perceived risk. This lending is applied to people with a history of delinquency or defaulting, those with bad credit, or those simply with limited debt experience (eg students).Subprime lending was a common type of lending during the 2007 credit crunch. Now… according to the Wall Street Journal, 61 percent of all subprime borrowers actually do have the ability to take out a prime conventional loan. So it is wise to know your options before putting yourself at risk.Home Equity LoanA home equity loan is simply a loan wherein a borrower puts the equity of their house up as collateral. This is common as a means of paying for much needed home repairs, paying for hospital bills, or even financing the purchase of a new car. Equity loans are given in one lump payment generally with a fixed, as opposed to adjustable, interest rate.It’s not advised that you take this route unless you absolutely need to, and can be absolutely certain that you can pay it off. That said, this can be an excellent way of turning your home into an investment for starting a new business or paying unforeseen expenses.Home Equity Line of CreditA Home Equity Line of Credit, or HELOC, is a different form of Home Equity Loan. Whereas a Home Equity Loan uses the home as collateral for a lump sum, the HELOC uses the home as collateral for a line of credit. The line of credit is offered for a “draw period”, which could be anywhere from five to twenty five years, and repayment will be of the amount drawn, plus interest, which may be adjustable. This type of loan has become popular in the US because it can be deducted from one’s taxes.RefinancingRefinancing is basically the trading of one debt for another. The benefit can be a lowered interest rate or smaller monthly payments. In recent years, this kind of debt-swapping has become popular thanks largely to the strife in the global economy, leaving home owners unable to meet the demands of a loan taken out before the UK and US recessions.