There are many new types of loans available. This quick guide is designed to help give a basic summary of your loan options.
Table of Contents
1. Loan length
Loans have a defined length of time for which they are made. They are generally for 15 years, 20 years, 25 years, 30 years, or even now, 40 years. This is how long the loan is in effect. The shorter the length of the loan, the higher your monthly payment will be. One of the reasons that people are choosing 40-year loan terms is because of the lower payment it offers.
2. Payment size
A typical loan requires you to pay it off over time. This payment includes interest and part of the principal. Over time, the principal is paid down until the loan is paid off.
There are additional loan options now that affect your payment size. Some loans offer the option to pay interest only for a certain period, after which the loan becomes a regular installment loan. This interest-only period allows you to make a lower payment than you otherwise would. It does not reduce the size of the loan.
Another loan option is to pay less than interest-only. This is a negative amortization loan. The shortfall in your payments is added to your principal. Many people opt for this type of loan to get the lowest possible payment. The minimum payment period is usually for the first five years but may change depending on your circumstances.
3. Hybrid loans
These loan types are loans that are fixed for a certain term but allow for different payment options over time. An example of this is a 30-year fixed loan that allows for interest-only payments for the first 10 years. The interest rate on this loan never changes, but the payments allowed over the first 10 years are lower than the payments for the final 20 years.
4. Prepayment penalty
Loans may come with a prepayment penalty. This is a payment that you must pay if the loan is repaid too quickly (if the loan is refinanced, for example). Prepayment penalty periods can last from several months to several years. The penalty size is usually a function of the size of the loan and the interest rate. Some lenders offer this with the incentive of a lower interest rate. If you plan on staying in your house for 5 years, then a 1-year prepayment penalty is something to consider. These prepayment penalties have two possible types:
“hard prepayment penalty,” which is triggered by either a refinance or sale of a property (this is how most prepayment penalties are structured) “soft prepayment penalty,” which is only triggered by a refinance, not a sale of the property
5. Cashing out
Many lenders allow you to “cash out” the equity in your home. If the value of your house has risen over time, you can tap into this with a loan. Typically banks will not allow you to “cash out” of your home until 6 months or a year after you buy it, regardless of how much equity is built up. You may find a lender that will allow you to cash out your down payment, but the lender will only use the purchase price value of the property for the first 6 months or a year. Lenders that will allow you to use a new appraised value after only six months tend to be more aggressive and as such, may have higher interest rates.
6. Investor loans
There are many loans available for real estate investors. Many of these now involve 100% financial for single-family residences. This gives an investor the maximum leverage available. This can be used to cover different types of rental properties, from single-family residences to smaller multi-unit properties.
