What is Loan and Type of loan || 13Mini.com

 

What is Loan and Type of loan

What is Loan

A loan is a transaction in which two parties agree to give something (the debt) to each other in exchange for something else (the asset). If the borrower fails to repay the loan, then the lender may take possession of the asset and sell it to recover the money lost on the loan.

Type of Loan

1. Conventional Loans

 Conventional loans are basically any type of loan where the interest rate is fixed over time. There are two types of conventional loans: Fixed Rate Mortgages and Adjustable Rate Mortgages (ARMs). 

1.1. Conventional loans have been around since the early 1900's, but they were only recently changed in 1970's. When banks started lending money to people who couldn't pay back their debts, interest rates skyrocketed due to increased risk. In order to avoid taking a loss on these high-risk loans, banks began charging higher interest rates, resulting in loan sharks popping up everywhere.

 1.2. Loan sharking was eventually outlawed in 1984 with the introduction of payday loans. Payday loans are short term loans with small amounts and low interest rates. However, while it may sound great to get a $20 cash advance on your credit card, they aren’t actually a good solution to your financial problems. Most credit cards charge a fee known as finance charges (interest) when you go over your limit. If you continue to use your credit card after paying off the initial balance, you will end up paying even more fees and interest than if you just paid off the full amount at once. As stated before, payday loans don’t offer long terms, so you will likely need them again soon.

 1.3. To get out from under the burden of debt, consider seeking out a conventional loan. Conventional loans are designed to help lower income borrowers cover bills, not make a profit. Interest rates are much lower than those associated with payday loans, although the length of the loan is usually longer. Lenders are less inclined to lend money if you already have bad credit, so it’s best to find a lender willing to work with you. You might feel tempted to apply for a loan online using one of the many websites that advertise fast cash advances, but keep in mind that you are putting yourself at risk of identity theft.

 If you do manage to borrow money, make sure you repay the entire amount as soon as possible. Don’t let the cycle start over again!


 2. Fixed Rate Mortgage

 The borrower assumes an initial rate for a predetermined period of time. A fixed rate mortgage does not adjust rate based on changes in market conditions, so if rates go down, the lender makes less money. If rates rise, the lender makes more money. However, a fixed-rate mortgage requires borrowers to make monthly payments at consistent levels for a set term. ARMs work similarly but have variable interest rates that change over time.

Fixed rate mortgage loans or variable rate mortgages have been around since the early 1900's. These types of loans are tied to interest rates that move periodically based on changes in the Federal Funds Target Rates (FFTR) set by the U.S. Federal Reserve Bank. A fixed rate is generally tied to a specific interest rate. As the target rate moves higher, the lender may increase the interest rate charged to borrowers on existing loans to maintain the original interest rate. Conversely, if the target rate decreases, the lender will lower the interest rate charged to maintain the initial interest rate. Fixed rate mortgages do not provide the same flexibility as variable rate mortgages.

 Why Choose Variable vs Fixed Rate Mortgages?

 Variable rate mortgages offer the following advantages over fixed rate mortgages:

 * Interest rate risk management - Variable rate mortgages allow the borrower to avoid paying a premium for low interest rates. If the FFTR rises above 5%, the lender may reduce the interest rate charged on the loan, reducing the monthly payment and lowering the total amount owed. On the flip side, if the FFTR falls below 2% then the lender may raise the interest rate and increase the monthly payments to maintain the original interest paid. Since there is no guarantee that the FFTR will stay at any particular level, borrowers should carefully monitor their interest rates to minimize the change in monthly payments.

 * No prepayment penalties - Variable rate mortgages eliminate the potential loss of equity due to a rise in interest rates before a loan is fully repaid. In addition, there is no penalty for prepaying the principal balance of a variable rate loan prior to maturity. In contrast, prepayments on a fixed rate loan result in a capital gain or loss depending upon the remaining term of the loan.

 * Loan amortization schedule - Variable rate mortgages allow borrowers to pay down the principal balance of the loan at their own pace without incurring additional fees. Borrowers are able to make larger lump sum payments and smaller periodic payments toward the principal balance. In contrast, fixed rate loans require borrowers to make each payment evenly spread out throughout the term of the loan. This results in fewer lump sum payments and longer terms before prepayment.

 * Loan limits - Variable rate mortgages have greater loan limits than fixed rate mortgages. Variable rate mortgages are allowed to borrow amounts equal to 125 percent of the home's appraised value. However, fixed rate mortgages cannot exceed 110 percent of the appraisal value.

 * Lower taxes - Many variable rate mortgages carry tax deductions similar to those associated with conventional fixed rate mortgages. However, fixed rate loans often receive no tax deduction related to interest payments. Instead, fixed rate loans typically qualify for the Section 163(h)(3)(i) exclusion regarding qualified residence interest. This excludes from taxation the portion of the loan interest attributed to qualifying residential property.

 How do I choose between Fixed & Variable Rate Mortgages? 

 There are two primary factors to consider when

 3. Adjustable Rate Mortgage

 An ARM adjusts the interest rate periodically throughout the term of the loan, based on changes in the prime rate plus or minus some percentage. The borrower may choose how often they want their interest rate to increase or decrease and whether they prefer a fixed or floating rate.

3.1. Lender Approval - Credit Score

 The first step in getting approved for a mortgage is having a sufficient credit score. You may have heard the term “FICO” (Fair Isaac Corporation), the company that develops scoring models used by lenders to determine if applicants qualify for loans. The higher your FICO score, the easier it is to get approval for a home loan. There are several different types of FICO scores, including traditional FICO score, VantageScore, and Equifax Risk Scores. Traditional FICO and VantageScores range between 300-850; while Equifax Risk scores vary from 250-700. In addition to these three scores, lenders use other factors such as income, employment history, debt ratio, and previous mortgages to help them decide whether or not to approve someone for a mortgage. If you don't currently have enough money to buy a house, you might consider applying for a mortgage refinance instead. Refinancing involves taking out a new mortgage on your existing property, reducing the amount of money borrowed and extending the repayment period. While refinancing a mortgage requires some extra paperwork, it's often beneficial for borrowers who already own their homes.

 3.2. Loan Type

 Once you've received a lender quote for a specific interest rate and monthly payment, you'll need to choose the type of mortgage that best suits your financial situation. There are two broad types of mortgages: fixed and adjustable rate mortgages. A fixed rate mortgage ensures that your interest payments remain the same throughout the full length of the loan. On the other hand, adjustable rate mortgages (ARMs) have variable rates that adjust at regular intervals along the loan's duration. ARMs tend to offer lower initial interest costs than fixed rate mortgages, though they also require larger down payments and payments over longer periods of time. Adjustable rate mortgages are great for people with short-term plans and varying incomes. However, ARMs often feature a locked APR, where the borrower's interest rate cannot be changed after the application is submitted. Fixed rate mortgages are ideal for those looking for maximum stability and security in their payments over long periods of time. People with low credit scores might find that standard bank loans aren't available. Instead, they should consider using unsecured personal loans, which are offered by private companies and banks. Unsecured personal loans allow you to borrow a set amount of money without putting up any collateral or paying a deposit. These loans are usually issued with shorter terms and high interest rates, meaning that borrowers pay back a lot of money upfront and make smaller repayments over the course of the loan. The loan application process varies depending on the lender. Many lenders require both online and paper applications. Others only accept applications over the phone or via fax. Still others only take applications in person. Once you submit your application, lenders will review your information and give you a decision on whether or not to provide a loan. Most lenders require a minimum credit score before approving anyone's application, though some

Post a Comment

Previous Post Next Post