Types of Real Estate Loans

There are so many real estate terms that it sometimes feels as though you will never figure it all out. Buying a home or property can be very confusing. To top it off, there are several types of mortgages you can take out to finance your home. With just a bit of research you can become more knowledgeable and prepared to undertake this process.

The four standard types of real estate loans are adjustable interest rate loans, fixed interest rate loans, balloon payment mortgages and convertible mortgages. With a fixed interest rate loan, you are set up with a specific interest rate and you pay according to that amount for the lifetime of your loan. With an adjustable rate loan, your interest rate can vary due to market fluctuation. This can be wonderful if the interest rate goes down, but if it goes up you might have difficulty budgeting enough money to pay the note each month.

A convertible loan is essentially an adjustable interest rate loan that can be converted to a fixed rate within a certain time. This can be very handy if you are anticipating an upcoming lower interest rate. If you are not careful though, the time can lapse before the rate lowers, or perhaps the rate will not lower as expected. A balloon payment loan is when not amortized any of the loan principle and it all comes due at the end of the term of the loan. This can help a homeowner make lower monthly payments and you will have a larger portion of your mortgage payment that can be used for the mortgage interest tax deduction.

With each loan there are other specific benefits and potential downfalls, and it is best that you discuss with your loan officer about which loan he or she would determine to fit your needs best. If you have an inconsistent or unreliable income, you could choose an option mortgage where you pay the interest and supply labor to "work off" some of the principle. The problem with this type of loan can be that the payments are too low and can actually cause the homeowner to fall further into debt.

Stretching out your mortgage for 40 or even 50 years will definitely lower your payments, but the downside to this type of mortgage is that you will end up paying a significantly higher interest rate than someone who pays off their home in 30 or even 20 years.