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|The majority of people in the United States rely on loans to buy their homes. Statistics from the Board of Governors of the Federal Reserve System show that Americans have taken out home loans totaling more than $13 trillion to date. Of course, it is vital to choose a home loan that suits your specific needs.|
Types of Home Loan Products
|In general, there are two categories of home loans: fixed rate and adjustable rate mortgages (ARMs). However, in order to cater to the needs of different clients, lenders usually vary the terms of the aforementioned home loans to create more loan products.|
Fixed Rate Mortgage
|With this type of loan, the borrower pays the initial amount at a fixed interest rate and this has several inherent advantages. First, monthly payments do not change throughout the lifetime of the loan. This obviously makes it easy for borrowers to budget their income. Additionally, a fixed rate mortgage becomes affordable whenever interest rates are low. For these loans, most lenders offer 15-year and 30-year payback periods.|
|An ARM differs from a fixed rate loan in one key aspect; the interest rate is not fixed. This means monthly payments rise or fall depending on prevailing interest rates. Nevertheless, ARM borrowers benefit from an initial fixed rate period during which rates remain constant. This period is not standard across board and ranges anywhere from a few months up to 10 years. After this period expires, rates fluctuate based on indexes such as the London Interbank Offered Rate (LIBOR), the Federal Reserve Board's weekly yield on one-year Treasury bills, as well as the 11th District Cost of Funds Index (COFI).|