Traditional Loans, a Closer Look
The good features of traditional loans are fixed rate, no prepayment penalty, and you get a deed to the property which means you own it as long as you make the payments. Having a fixed rate is good so that your payment doesn’t go up unless the taxes or insurance go up. Not having a pre-payment penalty is also good so that you can pay off your loan or refinance your loan without paying a high fee to do so. Having a deed to the property is important because as long as you have a deed to the property and make your payments, the bank can’t take your home.
The bad news with traditional loans is that they have a tremendous amount of closing costs which really don’t help you at all they’re only there to make the bank rich. Typically you will pay up to 4% of the sales price towards closing costs that is spent on fees instead of your house. Most people accept these fees as a part of the normal process when buying a home and they are right unless you buy using an owner finance program where typically most or all of the fees are not present.
The worst problem with traditional loans in my opinion is that you never seem to pay the home off. They let you structure the loan on a 30 year term which limits you from paying your home off in a resonable number of years. After three or four years of making payments you still owe pretty much what you paid for the house in the first place. Loans are structured that way for 2 reasons. First, people want to qualify for as much home as they can and the easiest way to lower their monthly payment is to extend the term of the loan. The problem is that with a 30 year loan, a borrower will pay very little towards the principal in the first years of the loan. The second reason loans are structured on a long term is that the banks don’t want you to pay off your home because once your home is paid off, they don’t make any more money off of you. By structuring loans on a 30 year basis, they are guaranteeing that you will be a repeat customer because most people move every 3-5 years. Because you have paid almost all interest to the bank in the first 3-5 years, people have to borrow about 95% of the cost of their new home as well and the cycle starts all over again.