Purchase Loans

Purchase loans, more typically called home loans or mortgages, are loans that allow a buyer to finance the purchase of a home or other real estate. Financing the purchase of real estate means payments are made over a period of time. The loan is secured by the real estate. The lender makes its money on the interest they charge for the loan.

Mortgages come in many varieties. The two most common purchase loans not originated through a government program are:

• The term, conventional mortgage usually refers to a 30 year loan where the interested rate is fixed or stays the same over the life of the loan. Conventional loans are not obtained through a Federal Program like the Veterans Administration (VA) or the Federal Housing Administration (FHA), etc. Conventional loans are also known as firsts because the lending institution has the first claim on the property in the event of foreclosure.
  
  
• An adjustable rate mortgage (ARM) is a loan where the interest rate is adjusted over the life of the loan. The adjustment is based on some measurement, like the prime rate. The length of an ARM varies, as does the period of time between adjustments. The period between interest adjustments may be as frequently as monthly or other period like annually, every three years, etc. From a buyer's point of view, the advantage of an ARM, when the interest rates are low, is the payments are low. However, the risk is that as interest rates rise, so do the monthly payments.

Within these general definitions are an almost infinite number of variations. For example, although the term of a purchase loan is typically 30 years, there are purchase loans available for both shorter and longer terms.

Another example is known as a balloon mortgage. This type of loan is designed to have relatively low payments for a period of time, after which, the whole amount becomes due. Generally, people who take out balloon mortgages expect to re-finance that final balloon payment.

Interest only is another type of mortgage. In this case, only the interest is paid for a fixed period of time, usually five to seven years. At the end of the term, you either refinance, pay off the whole loan or start paying both principle and interest.

The interest rate you'll pay depends on the type of loan, your credit score, and the financing institutions appraisal of the property that is securing the loan. On the whole, the lower the interest rate, the lower your payments will be. On the other hand, there are many reasons to consider an ARM or other type of purchase loan. It may, for example, be in your best interests to keep the monthly payments low early in the purchase; later, as your income increases, higher monthly payments may be acceptable.