Types of Loans

Fixed Rate Mortgage

With a fixed rate loan, your monthly payments are easy to budget and you’ll continue to pay the same interest rate even if rates rise. On the downside, if the rates drop, you will have to refinance in order to lower your rate, which can cost you money in refinancing charges. 30-year and 15-year fixed rate mortgages are common mortgages.

Adjustable Rate Mortgage

If you plan to move within seven years or less, an adjustable rate mortgage (ARM) may be a good option for you because of the lower initial payments and the possibility of a zero-point loan. If rates fall, your rates will fall too, but a jump in rates will cost you. A convertible ARM will let you convert to a fixed rate if rates climb too high, but it will cost money to make the conversion. Two-step mortgages give you a fixed rate for a fixed short term, say five or seven years, before converting to an ARM.

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Construction Loans

Depending on the type of builder you hire to construct your home, you may need a construction loan to get the project started. A construction loan is a short-term loan used to purchase the land and materials and pay for the construction labor. When the house is completed, the construction loan is paid off with a permanent mortgage.

During construction, the builder will make several draw requests from your construction loan lender. Money for materials and labor during building comes out of the construction loan.

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Turn-key Builder

A turn-key builder typically does not require a construction loan. The term “turn-key builder” essentially means that when this type of builder delivers a brand new home to you, all you have to do is “turn the key”. Much of the legwork, including the construction loan process, is taken care of for you. Planned community builders often fall into this category. Requirements vary, but many simply ask for a down payment when you sign a contract, with the balance due at closing. A turn-key builder will not finance your purchase, but can offer suggestions on securing a mortgage loan.

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Home Equity Loan

For remodeling projects that are too large to pay in cash, many home-owners opt for a home equity line of credit or a home equity loan.

With a home equity line of credit, your bank or mortgage broker will approve you up to a certain amount of revolving credit. As your remodeling project progresses, you can draw on your credit line, often using special checks issued by the lender if you need to buy certain items, or if the contractor requires a payment. You can spend as much as you need and do not have to spend the whole amount. You are responsible for paying only the interest, then the outstanding balance is usually paid off or rolled into a traditional mortgage after the project is completed. The amount of credit you can get is based on a formula that takes a percentage of the appraised value of your home and subtracts the balance you still owe on your existing mortgage.

A home equity loan might be more suitable if you know the specific amount of money you will need for a project. This type of loan will give you a fixed amount of money with a set schedule of equal payments.

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