Not all mortgages are created equal, and once you start looking for a mortgage, you will quickly learn that there is a mind boggling assortment of types of mortgages.
One of the first decisions you will have to make is whether you prefer a fixed rate mortgage or an adjustable rate mortgage. A fixed rate loan will usually be at a higher rate than a variable rate mortgage. The reason for this is that the bank is taking a risk if interest rates rise and your loan is not earning as much as newly granted loans. So they try to make more interest at the outset.
Despite the higher level, many borrowers prefer a fixed rate, because then they will be protected against an jump in interest rates. But there are instances when this is not a good idea, for example if you are not going to live in your home for a long period. A guideline is that you will need at least 5 years to make up the difference in the rates.
If you think you will not be in the same house for ten years or so, the adjustable rate market is probably a better choice. The payments will be lower with an adjustable rate mortgage, and even though you have the risk of higher rates, you would have that when you sold the house anyway.
In addition to deciding on an ARM (adjustable rate mortgage), these days you have to decide upon the index that will be the basis for the rate adjustment mechanism, and understand the rate adjustment cap (how many times and at what maximum percentage the rate can move) as well as the maximum interest rate.
Another choice to make is whether, and how long you prefer a lock in period. This will fix the interest rate for a period of time. The rate will be decided by the length of the lock in period-the longer the period, the higher the rate.
Next you have to decide upon your down payment. In a lot of cases, there is not much to think about, since the buyer will deposit as much as he can afford. In some cases, however, those with funds to spare may have to make the comparison between the benefit of a higher down payment with the option of earning interest with another investment.
Another choice facing borrowers is how many points to pay. Paying up front points will not be worth while if the loan is not going to be outstanding for a very long time.
How can the poor borrower decide among all of these options? With all of these kinds of loans, and new ones being brought on the market almost every day, such as interest only loans and options based loans, it is not surprising today’s borrower is confused.
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