August 11th, 2014 8:56 AM by Jackie A. Graves
Whether you’re looking for a new home or need to do some considerable remodeling, you’re probably going to need a loan. In order to
choose the best one that best fits your financial and home-ownership needs,
you’ll need to figure out which one is best for you. To help you navigate the
process, here are seven common types of loans and what they cover.
Conventional loans are mortgage
loans from mortgage lending institutions not backed by an agency of the
government such as the U.S. Department of Veterans Affairs or the Federal
Housing Administration. Conventional loans can be either conforming or
A conforming loan conforms to the guidelines
set by Fannie Mae and Freddie Mac. The main guideline is the maximum loan
amount. This amount can vary depending on the home’s location—for example, a
house in a high-income area can be eligible for a larger loan than one in a
general income area.
Other qualification guidelines are concerned
with the borrower’s debt-to-income ratio, loan-to-value ratio and credit
Non-conforming loans do not conform to the
qualifications and guidelines set by Fannie Mae and Freddie Mac corporations.
If you require a loan larger than a
conforming loan, you will be looking at non-conforming loans, such as jumbo loans.
With a secured or collateral loan, you
leverage personal property to obtain the loan. If you default, the property is
transferred to the lender.
The interest rate and loan amount can vary
depending on the value of the property you leverage. Generally, higher value
property can get you a larger loan and possibly a better interest rate, although other factors—such as loan
length and credit history—will also be taken into consideration.
Common examples of personal property used to
secure a loan include these possessions:
Savings accounts and CDs
Unsecured loans are not backed by collateral,
so the interest rate and size of the loan is determined by your credit history
and income. Unsecured loans are also known as personal or signature loans.
If you have a good income, sterling credit
and a solid payback plan, these can be a good option.
Open-ended loans are loans with a fixed-limit
line of credit that can be borrowed from again after they have been repaid.
Credit cards are one type of open-ended loan.
A home equity
line of credit, or HELOC, is another. HELOCs work like this: The
lender approves you for a certain amount of credit based on a percentage of
your home’s appraised value, minus the balance owed on your mortgage. The sum
acts as a credit line you can borrow from, pay back and borrow from again.
Homeowners renovating their home may
want to consider this option to fund the project.
Closed-ended loans are loans that cannot be
borrowed from again, like student loans, mortgages and car loans. The loan
decreases with each payment. If you want more credit, you have to apply for a
new loan. If you need a set amount of money and nothing more, this is a common
way of doing so.
By: Craig Donofrio - Updated from
an earlier version by Wendy Dickstein.
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