Types of Home Loans

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By Bill Herrfeldt
eHow Contributing Writer

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There are five basic types of home loans: first mortgages, second or third mortgages (or some other number), home equity loans, home equity line of credit (HELOC) or home improvement loans. Within each category of loans, some have fixed rates of interest while others are variable. Some require interest paid on them with a balloon payment at the conclusion of the loan that must be refinanced or paid. Others require you to pay down the principal each month.

First Mortgage

These loans are normally issued at the time the real estate is acquired. The borrower must undergo a credit check and provide a valid appraisal of the real estate. Some states require that a home inspection be conducted before a first mortgage is given. These mortgages can have varying maturities, but the most common is 30 years. A maturity of 15 years reduces the amount of interest paid. Ordinarily, a down payment of some percentage of the value of the real estate is required by a mortgage lender.

Second or Third Mortgage (Or Some Other Number)

Either a borrower has made a sufficient number of payments on his first mortgage or the real estate has appreciated in value since the first mortgage was issued before a second mortgage can be made. When a borrower assumes a second mortgage, he can withdraw funds to use for any purpose, but the borrower also assumes responsibility for another monthly payment.
Later, he may choose to remortgage the real estate for additional money. In some cases, a borrower may have six or seven mortgages on the same real estate. They are numbered to reflect the order in which they are to be paid when the real estate is sold. Most mortgages after the first mortgage have maturities that are shorter than the first mortgage. Finally, most lenders will not allow a borrower to exceed 80 percent of the value of the real estate in calculating the size of this loan, after the previous loans are considered.

Home Equity Loan

This type of loan is a subset of loans you might pursue after a first mortgage is made. Usually, it has a fixed rate of interest and matures in 10 to 15 years. Just like a second mortgage, it pays the borrower the proceeds in a lump sum at which point she will begin making monthly payments.

Home Equity Line of Credit (HELOC)

Another subset of a loan other than a first mortgage, a HELOC does not pay the borrower anything upfront, but the borrower can withdraw any or all of the funds, at will, whereupon he will begin making monthly payments. Because of its character, HELOCs charge variable rates of interest, usually a function of the prime rate. A borrower's payments will fluctuate based on the prime rate.

Home Improvement Loan

As its name implies, this type of loan is made so that a borrower can pay for improvements to his house. In most cases, the borrower will not mortgage his house to make a home improvement loan because it is a personal loan. Also, a home improvement loan will have a shorter maturity than any type of mortgage loan, and it requires larger monthly payments.