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Which Type of Home Loan is Right for You?

Which Type of Home Loan is Right for You?

If you are new to the world of home loans, the number of options at your disposal is enough to make your head spin. You know all about the basic "new purchase" mortgage and what it entails, but have never given much thought to the others: refinance, home equity, home improvement, debt consolidation and loan modification.

What are these other types of home loans, and which one is right for your particular situation? Here we take a closer look at these loans so that you may decide which is best suited for your needs.

New Purchase Mortgage

The most common type of home loan is the new purchase mortgage, which is granted to home buyers so that they can finance the purchase of a new or existing home. When you begin your home buying quest it is important to familiarize yourself with the types of loans available and the terms that go along with them. The biggest difference in mortgage loans is the fixed-rate mortgage and the adjustable-rate mortgage.

A fixed-rate mortgage keeps the same annual percentage rate (APR) through the life of the loan. The interest rate will never change and the homeowners can rest assured that their payments will remain the same until the end of the loan. An adjustable-rate mortgage, on the other hand, has an interest rate that will adjust periodically in the life of the loan. However, these loans typically have lower payments and come with the option to convert or refinance to a fixed rate at a later time. This type of mortgage is good for homebuyers that plan to live in their homes for only a few years.


Refinance loans are for current homeowners who seek to change the terms of their existing loan or use their home's equity for other purposes. There are several reasons you may want to refinance your home loan:

   • You have an adjustable-rate mortgage and you'd like the security of a fixed rate

   • You'd like to lower your monthly payment

   • You want to get equity out of your home in the form of cash

When you refinance your loan you are essentially restructuring your debt with new debt. The new loan pays off the old loan, and you begin to make payments on the newer loan.

Home Equity

Home equity is the difference between the home’s fair market value and the outstanding balance of the loans on the property. When a mortgage has been paid in full the property belongs to the mortgager, but in the meantime the mortgager has the option to borrow against the equity in the home.

There are two types of home equity loans. The first is known as a second mortgage. This type of loan lends a lump sum of money to the mortgager and must be paid over a fixed period of time.

The other type of home equity loan is a home equity line of credit, or HELOC. This gives the mortgager a line of credit similar to a credit card but in this case the funds are drawn against the equity in the home.

Home Improvement

This loan works like a home equity loan with an advance of funds to the property owner, but the money must be used for improvements such as maintenance and repair. A home improvement loan is usually short-term, and its resulting repairs and improvements may increase the value of the home.

Debt Consolidation

Debt consolidation is basically taking out one loan to pay off many others. A borrower may use their property as collateral in order to decrease the amount of interest they are paying on other debts, such as credit cards. The loan is used to pay off high interest debts by getting a lower interest rate and by making one payment a month versus many payments.

Loan Modification

Loan modification takes place when a borrower facing financial difficulty and having trouble making their mortgage payments works with their lender to change the terms of the mortgage. This usually involves a reduction of the interest rate on the loan or an extension of the length of the loan terms. A lender is willing to change the terms as such because they otherwise stand to lose more if the home should go into foreclosure.