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Does One-Size-Fit-All When It Comes to Loans?

As there are many different people and businesses that have different financial needs, there are inherently different types of loans that would suit them best. This is a fairly vague negative answer to the question of whether one size fits all when talking about loans. Here are some very compelling facts that add to this answer.  

Loan term length

The time it will take you to completely pay off your loan if you make regular payments is called a loan term. There are three standard loan term types: short-, medium-, and long-term loans. Each of these types of loan term lengths come with many benefits, and also many drawbacks which might not be suited for everyone. This fact adds to the case that when it comes to loans, one-size definitely can’t fit all. The main aspects by which these loan terms differ from one another are the monthly payment, the interest rate, and the amount of interest that will be paid throughout the loan. To put it simply, the longer the loan term is, the lower the monthly payment will be, as opposed to short-term loans. However, short-term loans offer much lower interest rates, unlike long-term loans where the interest can add up over the many years it takes to pay it off. However tempting long-term loans may seem because of their low monthly payment, the amount of interest rate should make you think twice if it’s the right choice for you.  

Interest rate type

As well as loan terms, there is more than one interest rate type. To be more exact, there are two possible options with interest rates and those are either a fixed rate or adjustable interest rate. This distinction is important because it will affect whether your interest rate will change, whether your monthly payment can change, as well as what its amount will be, and finally, how much interest will be paid over the life of the loan. Picking the right interest rate can be especially important if you own a business, and not if you need it for just yourself. If you want to make sure you’re making the right call, compare and apply here to find more about how interest rates work. In most cases, a fixed interest rate has lower risk as opposed to an adjustable interest rate. This kind of uncertainty that’s associated with an adjustable rate makes it the less favorite choice among interest rate types. Adjustable-rate has a fixed initial period, after which the rate can either increase or decrease depending on the market. However, the adjustable interest rate has reigned over the fixed interest rate because it has a much lower interest rate to start. To answer the question – one size doesn’t seem to fit all in here either. loans

Understanding ARMs

To further review and answer the question “does one size fit all” negatively, let’s review our next factor. ARM stands for “adjustable-rate mortgages”. As a general rule of thumb, most adjustable-rate mortgages have two periods. During the first period, the interest rate is fixed, meaning it can’t change. During the second period, however, the interest rate will go either up or down (or both) based on how the market changes. An adjustable-rate mortgage is often represented in the form “first number/second number”. The first number refers to the number of years the interest rate will stay fixed. Commonly used fixed periods are 3,5,7, and 10 years. The second number means how often the rate will adjust after the fixed period has ended. The most common adjustment period is simply “1”. This means that you will get a new rate, and a new payment amount every year (after the fixed period ends). Other, but very rare adjustment periods include “3”, and “5”, meaning once every three years, and once every five years, respectively.

Loan type

This is perhaps the loan aspect that has the most variables in it, and which defeats the “one-size-fits-all” idea when it comes down to loans. Mortgage loans are divided into categories based on their size, and whether they are a part of a government program. The loan types are the conventional, FHA, or special programs. There are a few important aspects that this choice affects:

  • The amount you’ll need for a down payment
  • The total cost of the loan, with the interest and mortgage insurance
  • How much you are able to borrow, and the house price range you want

The majority of loans are conventional, and they usually cost less than HA loans but are slightly harder to get. FHA loans allow low down payments and are available to those with a low credit score. As far as special programs are concerned there are three types that benefit three groups of people: VA for veterans or surviving spouses, USDA for low- to middle-income borrowers, and Local for low-to middle-income borrowers too, as well as for first-time homebuyers.

Mortgage insurance insight

Mortgage insurance offers some advantages you might have not been aware of. One of the most compelling reasons mortgage insurance is beneficial is because it can help you get a loan you otherwise wouldn’t have been able to get. For example, let’s say a necessary down payment is twenty percent, and you can’t afford it, then it’s very likely that you will have to pay for mortgage insurance. Some of the options to help you are to choose to get a conventional loan with PMI insurance (private mortgage insurance), VA, USDA, or an FHA loan. Depending on the type of the loan, you will usually have to pay monthly mortgage insurance premiums, or an upfront mortgage insurance fee (or both). Meaning the mortgage insurance will usually add to your costs. Another thing to keep in mind is that mortgage insurance will protect the lender if you fall behind on your payments, but not you.   After we’ve thoroughly reviewed all the aspects that make a certain loan unique, we can conclude that there are many variations of what a loan might be. This of course heavily depends on the borrowers’ needs, but the facts can stand alone to support the fact that when it comes to loans “one-size-fits-all” is simply not realistic.

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