17.7 Types of Real Estate Loans

Real estate loans come in different forms based on how they’re repaid, how the interest rate is structured, and what the loan is used for. In this topic, you’ll learn the most common loan types you’ll see in real estate transactions and what makes each one unique.

Loans by Purpose

One way to categorize loans is by what they’re intended to finance:

Purchase loans: used to buy real property.
Construction loans: short-term financing to build improvements; often replaced by permanent financing after completion.
Home equity loans / lines of credit: borrowing against existing equity (subject to current rules and lender guidelines).
Refinance loans: replace an existing loan (often to change rate, term, or payment).

Exam tip: Construction financing is usually temporary; “permanent” financing is the long-term loan that stays in place.

Loans by Interest Rate Structure

Another common way to describe loans is by how the interest rate behaves over time:

Fixed-rate loan: interest rate stays the same for the life of the loan (payment is typically stable).
Adjustable-rate mortgage (ARM): interest rate can change based on an index and margin after an initial period (payment may rise or fall).

Plain English: Fixed-rate = predictable. ARM = can start lower, but carries the risk of future payment increases.

Loans by Repayment Structure

Loans can also be categorized by how the borrower repays principal and interest:

Amortized loan: payments are structured so the loan balance is paid down over time.
Partially amortized (balloon) loan: payments may not fully pay off the loan by the end of the term; a large final payment (balloon) is due.
Interest-only loan: borrower pays interest for a period; principal payoff is delayed (often requires refinance or payoff later).

Watch out for balloons: A balloon payment can create refinance risk if rates rise or the borrower can’t qualify later.

Common Loan Program Labels (What You’ll Hear in the Field)

In practice, you’ll also hear loans described by program type or underwriting style (exact rules vary by lender and current guidelines):

Conventional loans: not insured/guaranteed by the federal government.
Government-backed loans: loans insured or guaranteed by agencies (program requirements apply).
Portfolio loans: loans a lender keeps in-house instead of selling on the secondary market.

Licensee note: Don’t quote program eligibility unless you’re the lender—refer clients to their loan officer for current requirements.

Quick Check-Ins (Self-Test)

1) Which loan type is most likely to require a large final payment at the end of the term?

A. Fully amortized loan
B. Balloon (partially amortized) loan
C. Fixed-rate loan
D. Conventional loan

Show Answer

Correct: B. Balloon loans are not fully paid off by regular payments, so a large final payment is due.

2) What is a key difference between a fixed-rate loan and an ARM?

A. Fixed-rate loans are always shorter term than ARMs
B. ARMs can change interest rate over time; fixed-rate loans generally do not
C. ARMs never require underwriting
D. Fixed-rate loans cannot be used to purchase property

Show Answer

Correct: B. ARMs adjust based on an index/margin after an initial period, while fixed-rate loans keep the same rate.

17.7 Types of Real Estate Loans