Which Loan Type Fits Your Needs?

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

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 non-conforming.

Conforming Loans

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 history.

Non-Conforming Loans

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.

Secured 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:

Houses
Vehicles
Savings accounts and CDs
Unsecured Loans

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

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.

Close-ended Loans

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.

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