If you are considering buying a home, then you may be more than a little confused by all of the terms you hear about home loans. After all, lenders throw around words like fixed rate, balloon mortgages and adjustable rate mortgages without a thought. But if you aren’t at least familiar with the basics—those terms can be pretty confusing!

Here’s a basic guide to the three most common types of home loans. Study it, and determine which one is right for you.

Fixed Rate Home Loan

If you are thinking about buying a home and staying in it until you pay it off, then you will probably want a fixed rate home loan. With this type of loan, you will be assigned a fixed interest rate, and then that rate will not change for the life of the loan. If interest rates skyrocket, yours will remain the same. On the other hand, if they plummet, you will likely be paying a higher rate. (You can always refinance in order to get a lower rate.)

Adjustable Rate Mortgage (ARM)

The interest rate with this type of loan goes up and down with the market. In other words, if the interest rate is low, the rate on your home mortgage will be low, but if it’s high, your loan interest rate will reflect it. And because the interest rate on a home mortgage loan affects the payments, you will never know from reporting period to reporting period what your monthly mortgage payments will be. This type of loan obviously isn’t for everyone.

So, who might use an ARM? For starters, if you are purchasing a house for investment purposes and plan to sell it quickly, you might take advantage of low interest rates by getting this type of loan—particularly if it looks as if they may go lower. Another reason to use an ARM as a home loan is if you are buying a home in a time when interest rates are on the decline. You can take out an ARM, and then change it to a fixed loan once the interest rates bottom out.

Balloon Mortgage

With this type of loan, you will make monthly payments for a fixed amount of time, with a fixed interest rate. The difference is that at the end of the payment schedule, you will owe the unpaid balance in one lump sum. If you use a balloon mortgage, you will find that the interest rates are much lower than either a fixed rate mortgage or an ARM.

The obvious negative to this type of loan is that huge payment due at the end, but if you are planning to hold the house for a short period of time, then this might be the loan for you.

By understanding the various types of home loans that are available to you, you will be better prepared to make a decision that is just right for you and your family.

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If you want to make your mortgage more manageable by refinancing, you have two options: you can reduce your payment while lengthening the mortgage terms, or shorten the mortgage terms while paying more or less the same amount monthly.

You may have observed how your adjustable home loan rate has been at its all time low in the recent years. Many people have started to resort to refinancing in order to cut down on mortgage costs. However, with refinancing, there might still be an element of risk involved. As such, some people find it wiser to shorten the mortgage payment terms instead of merely reducing monthly payments.

Home refinancing is a good option for those who would like to have better control of their finances. It is an excellent way to get a better home loan rate, lower monthly payments or shorten the duration of the mortgage itself. It is undeniable how refinancing is popular mainly because it is an opportunity to lower home loan rate while at the same time get better monthly payment deals. Though shortening mortgage duration is an option when refinancing, there are not as much people who go down this road.

Refinancing to Reduce Monthly Payments

The benefit of refinancing in order to reduce monthly payments is obvious and self-explanatory. When you refinance, you lower your interest rate and consequently lower the amount you need to pay. Who wouldn’t want this deal? The amount you save may be used to pay off other bills, or you can save this to pay for a part of your principal. Of course, you should never fall into the lure of spending some more just because you have extra money on hand.

Reduce the Life of Your Home Mortgage

Refinancing can allow you to shorten your mortgage terms while maintaining your monthly payment. For example, you can lower your home loan rate by refinancing, and then reduce your mortgage life span from 20 years to 15, while maintaining the same monthly payment. It might be more difficult to see how your financial burden is lessened this way, since you still need to pay the same amount. However, if you think of it in a larger perspective and in longer term, you can see how this may be a better deal for you.

You can look at it this way. Imagine a home loan rate of 5% on a 30 year mortgage. This will most likely cost you almost twice the amount that you borrowed. On the other hand, a rate of 5% on a 10 year mortgage will only cost you about 30% more of your principal as payment for interest. With the 20% difference in these two, along with the fact that you free yourself from the financial burden faster, it is easy to see how this option can generate far better deals.

Needless to say, if you still find it more practical and manageable to reduce your home loan rate by reducing your monthly payments, then by all means, do so. However, if you can get by without the extra savings refinancing can provide you; it may be financially wiser to reduce your mortgage duration instead. In the end, the choice will depend on your circumstances and financial goals.

Author- Want more financial advice that will make a great impact into your life? We have all these and more. Visit us at Home Loan Rate or Home Loan now to learn more.