What Types of Homeowner Loans Are There and What Differentiates Them?

Homeowner loan lenders offer two basic types of this loan, based on the interest rate of the loan. The first one is a fixed rate homeowner loan and the second one is the adjustable homeowner loan. Both of them have their advantages and disadvantages and before you decide on a particular loan type, you should know as much as you can about the two.

Fixed Rate Homeowner Loans

These loan have a locked interest rate. This means that, when you make the loan, the same interest rate is used through the entire length of the loan, from its beginning, to its end. Because of this, the monthly amount you have to pay for this loan will never change, which is its biggest advantage. On the other side, if the rate is high, the homeowner will have to pay more in the long run. You still have the option of refinancing, but this could mean additional costs.

Adjustable Rate Homeowner Loans

The adjustable rate changes with the interest rates. As such, the monthly payments also change. One of the problems about it is that a homeowner may not know how much exactly is he required to pay until the due date. That, however, does not mean that this type of homeowner loan is without its advantages. For instance, when the interest rate drops, the homeowner can take advantage of it immediately.

Should you start with a fixed or adjustable rate? Many prefer to start with the later, especially when the market has been steadily falling and then change to a fixed one when they reach a rate that suits them best. On the other hand, some people prefer to use a fixed rate and refinance when the rates fall significantly.

The choice between the two is naturally not easy and is something that a borrower should carefully consider before deciding on a particular one. Some lenders have even created loans that are a combination of different aspects of both of these loan types. For instance, they may offer you a discounted fixed rate for the first few months and then lock it at a certain rate after a specific time period. Although  this often be merely a sales tactic, this approach can make it much easier for a borrower when he or she can't decide between the two homeowner loan types.