If you are planning to take out a loan in order to purchase a home, you may think there is only one type of mortgage available. After all, you generally don't hear people talking about taking out a specific type of mortgage. Although the majority of buyers do take out what is referred to as a fixed rate mortgage, the reality is that there are several different types of mortgages available. When it comes to selecting the type of loan that is right for you having additional knowledge about these types of mortgages and their positives and negatives is a must. Here's a look at a few of the other types of mortgage loans that are available.

Also known as NINJA (No Income, No Job and No Assets) or liar loans, or Alt-A loans, these loans are given out without requiring the buyer to meet many requirements. As might be expected, these loans come with very high interest rates and fees, which make them quite lucrative for mortgage brokers. Making these loans are quite risky since the borrower does not have to provide any proof that he or she can actually repay the same. It is also not a good choice for you because of the high fees and interest rates that are associated with the loan.

You only pay the interest fees for the first 5 to 10 years when opting in for a balloon loan. After this period of time is over, you have to pay off the loan balance in one lump sum. This type of loan is mainly intended for those who are not planning to reside in the home for very long, as the intention is to sell the home before the lump sum comes due so the borrower has the money needed to pay the loan off. It goes without stating that the borrower will not build equity with such loans unless home prices increase significantly in the area after making the purchase. A person who takes out a balloon loan can be in a very difficult situation if the value of the home goes down when it is time to sell despite the fact that this type of loan may sound pretty nice because of the low monthly payments.

One also has another option and that is to take out a loan that covers 80% of the purchase cost of the home as well as another loan that covers the other 20%. The smaller of the 2 loans is then used as the down payment, which means you are actually borrowing the full amount of the loan. Due to this, you may actually find yourself owing more on the home than it is worth if the value of the home drops.

An Adjustable Rate Mortgage, or ARM loan, is loan with a variable interest rate that changes according to current interest rates. When interest rates are lower, this can interpret into a considerable savings for borrowers when compared to those with fixed rate loans. Borrowers with an ARM loan may face a significant increase in their monthly payments that may be difficult to pay when the interest rates go up.

These are just a few of the options available to you. While there are some potential benefits associated with these types of loans, they all come with risks as well. It is therefore easy to see why so many choose to go with the traditional fixed rate mortgage in order to avoid these risks.

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Article Submitted By: Crystal Guthrie
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