Home Loan Definition

Sub-prime mortgages have been getting a lot of press these days, and for good reason. Too many borrowers in recent years didn't understand what they were signing on for when taking out these home loans, and they have found themselves in deep financial trouble. In order to avoid falling prey to the mortgage crisis yourself, you first must understand what type of loan you have. Here is a rundown of the most common mortgage loans being offered these days.

The Fixed-Rate Loan

Considered the safest of all types of home loans, the fixed-rate mortgage allows the borrower to take out a loan at a certain interest rate for the entire loan term. That means that your last mortgage payment will be the same as your first---even if it takes you 30 years to pay off your house.

Adjustable-Rate Mortgage Loans

Although there is quite a variety of adjustable loans available in today's marketplace, they all have one important thing in common: your payments will increase over time. Adjustable rate mortgages (or ARMS as they are often called) usually offer a sample "teaser rate" that offers the borrower the opportunity to pay less the first few years of the loan, with larger payments due as the interest rate on the loan resets. This may be done monthly, quarterly or annually. Some of these loans have interest-rate caps, which allow the borrower some amount of safety, but most do not. This can cause a real hardship, especially if your payments double within a few years (which is often the case).

Interest-Only Loans

It may sound like a good idea at first to enjoy a much smaller payment the first few years of your loan by paying the interest only, but this can cause some serious trouble if you aren't careful. For one thing, you aren't building any equity in your home, which you may need if you plan to resell. Many people who used this option to keep payments low in recent years have discovered that they now owe more on their home than it is worth, due to plummeting housing prices.
Another danger in interest-only loans is the fact that many people "forget" that their payment is going to double or even triple at the end of the interest-only period. This leaves them unable to make those higher payments when they come due.
While these loans can give buyers a chance to get into a home a few years earlier than they may have otherwise been able to, buyers must be very careful to understand what they'll owe when the regular payments kick in.

FHA/VA Loans

The Federal Housing Authority (FHA) allows low- and moderate-income families to buy a home by offering them lower down-payment requirements and lower interest rates.
VA Loans are provided by the US Department of Veterans' Affairs for veterans of the Armed Services. These also have more lenient requirements for borrowers who qualify.

Jumbo Loans

A jumbo loan is a special loan that does not meet standard mortgage limits set forth by Fannie Mae and Freddie Mac, the nation's leading mortgage brokers offering government-backed mortgages. Loans in excess of $417,000 are usually considered a jumbo loan and may carry a higher interest rate because of their size.

Combo 80/20 Loan

Actually two loans instead of one, a Combo 80/20 loan is offered to borrowers with no money set aside for a down payment. By borrowing 80 percent of the mortgage using a conventional fixed-rate mortgage, you can then borrow the remaining 20 percent of the purchase price by taking out a second loan (otherwise known as a second mortgage) for a shorter period of time (usually no more than 15 years) at an adjustable rate.

Home Equity Loan/Line of Credit

When you owe less on your house than it is worth, the bank may allow you to take out a home-equity loan or a line of credit for the remainder of its value. An equity loan is just that, a loan that is given to the borrower with a set interest rate for a certain period of time. An equity line of credit is an open account that allows the borrower to take money from the account when needed with no further explanation or required acceptance by the bank. Although the money is always available, and interest is only applied to the amounts taken (and not the entire amount of the credit line), the interest rate is adjustable monthly, which can drastically change the amount of the payment due.