Borrowing money for a home purchase has some rules. The world of lending is intricate and anyone who wants funding needs to be able to wade through the many different loan products available. Mortgages are confusing these days and every different type of loan has variables that determine a different overall cost and payment throughout its lifespan. Many mortgage products are an apple-to-apple comparison and a basic education can help consumers make the right decisions for their individual financial situations.

The 30-year fixed mortgage

The most common type of mortgage is the traditional 30-year fixed model. It combines a fixed interest rate with a long-term lifespan. That breaks down payments and makes them manageable for millions of American households. This is the best loan for borrowers who are planning on staying in one house for a long period of time and those who want the stability of a monthly payment that doesn’t change. Though throughout the past few decades this is the type of mortgage that prevailed, in the past five years other more unusual mortgage loans began to take hold. Many experts claim that this is the reason for the lending crash that contributed to the recession. They believe that too many lenders tried to stray from the traditional time-tested 30-year fixed mortgage for the purpose of extending loans to more customers.

The 15-year fixed mortgage

This mortgage is very similar to the 30-year fixed mortgage. The difference is that interest rates on these types of loans traditionally are lower due to banks having a lower long-term risk. Borrowers pay off this type of loan in half as much time as its 30-year counterpart and it grows equity faster as a result. This is a great option for borrowers who want to pay back their mortgages faster. It is also a good option for borrowers who want to refinance their mortgages without extending the term back out to the 30-year model.

1-year ARM

ARM stands for adjustable-rate mortgage. This type of loan has no guaranteed mortgage rate over the course of the loan. There is an introductory rate on these loans that lasts for 1-year. Rates for these loans are significantly lower than those for other types of loans and the term is usually 30 years. For consumers borrowing money short-term, this could be a good option. Buyers who don’t plan on staying in one home for a long time can find lower monthly borrowing costs. It also works well for borrowers with the ability to make higher payments due to larger incomes.

5/1 ARM

The 5/1 ARM is another adjustable-rate mortgage that has a fixed rate for the first five years. After the initial five years, the rate adjusts periodically. Normally these are also 30-year long loans. These types of loans are good for borrowers who plan on selling within five years and want to keep their mortgage payments as low as possible. Again, borrowers with income to sustain higher payments can use these types of mortgages to their advantage. The thing to remember about this loan is that the interest rate is not guaranteed. Buyers benefit from a fall in the interest rate, but are stretched when it rises.

Other types of loans

Prior to the recession, lenders came up with various other loan structures to serve those borrowing money. There is an interest-only mortgage that allows a buyer to pay just the interest and leave the balance untouched. Balloon mortgages offer lower rates, but then require a large sum payment. Assumable mortgages can be transferred from a homeowner to a buyer to eliminate the need for a new mortgage for the sale. All borrowers should talk to a financial expert who specializes in mortgage loans prior to buying. They can assure that the mortgage product they get is truly the best one for their situation.

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With the world economy firmly entrenched in a reset mode, loans of all types are becoming more difficult to obtain. That is not to say that it is impossible. The fact of the matter is, financial institutions, banks, and credit unions will always make loans. It is the lifeblood of the financial industry.

The business part

With a record number of foreclosures, the inventory of available homes is large. That makes the market very saturated with homes that are in the hands of the home buyers. Therefore, banks will need to make home loans. The process for securing home loans may indeed be more difficult, but home loans are still very much available. Potential home buyers have many choices on where to secure home loans.

Changes made, documents are now a priority

One of the first differences home buyers will notice when trying to secure a new home loan is that the need for accurate documentation is now a priority. In the past, consumers could literally loan with no down payment, no documentation to prove income, and a substandard credit score. Essentially, with a signature a home buyer could secure a new home loan.

Today’s requirements

Those days are past. Today, lenders are requiring borrowers to provide accurate documentation to support a new home loan. That means being prepared as you begin your search for new lender.

More documents are needed

Gather all your financial statements and documents. Make sure that you pull a recent credit report on yourself. If you have pristine credit, securing a new home loan will not be an issue. However, if your credit score is below 650, it’s likely you will have to provide documentation to answer why your credit score is lower. This does not preclude you from a new loan, it just means providing more documentation.

This may mean having to provide explanation letters to prospective lenders about why your credit score or credit report shows a negative. Provided that you have overcome the issues that produced a negative score, and can provide documentation to that effect, lenders may be willing to provide a home loan for you.

The competition between lenders

It’s likely that you are bombarded with lenders advertisements trying to entice you into using their company. This can work to your advantage. Here is how. Make sure that any lender you communicate with understands that you are shopping on your own among several lenders. There is nothing like the thought of competition for a prospective lender to work harder for you. This may result in a lower interest rate, or other financial benefits. The point is to shop one lender against the other for your benefit. Lenders need borrowers as much as borrowers need lenders.

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Contrary to what you may have heard, many people still dream of owning a home. For those who already own a home, benefits may prove to be even more worthwhile. The only way to really make the most of your equity is to take out home equity loans.

Now that you own your home, you should make use of it and open up that equity. With a home equity loan, you can consolidate debts, make major purchases or investments, and put the money toward home improvements — the money is yours, and you can do as you please.

Strategize to maximize profit

Well, actually, the money isn’t yours yet, but it becomes yours as soon as you sell your home. With all home loans, you have to think of every move you make as something for potential profit. You won’t see the rewards of your hard work and dedication until it’s time to sell, then it all comes back around to give you the biggest financial boost of your life.

With your first home, you probably saved up for years just to have enough to make a down payment, then you spent years — probably decades –  paying off the remaining balance through a mortgage. Ne doubt that home appreciated in value, and now you are in position to use the equity that you have built in the form of a home-equity loan.

Home-equity loans not for everyone

Recently the housing market has suffered a serious downturn, and home values are not quite what they were just two years ago. However, if you have been in your home for a significant period of time and have not taken out a home-equity loan in the past, it is likely you have enough equity to aid your financial situation in a significant way. That being said, not every homeowner should secure a home-equity loan.

You must have a plan and purpose for your home-equity loan before starting the application process. While home-equity loans can be very helpful, they can also cause undue strain on your finances.

Don’t become a statistic

Home-equity loans are not free money. You must repay your home-equity loan over time. Many people get into more trouble with home-equity loans than most realize. Your home becomes the collateral for your home-equity loan. Failure to make payments on time can result in a foreclosure. In today’s economy many homes are being lost because borrowers are not able or willing to make home-equity loan payments.

While home-equity has long been a type of savings account for homeowners, home values have depreciated to the point that homes are not considered the investment they once were. It is best to consider why you need or want your home-equity loan and consider the cost. Home equity loans are a great tool for homeowners if used properly. If not, sacrificing your home ownership may become a reality.