Choosing the Right Mortgage Can Be Confusing
Gone are the plain vanilla days of traditional mortgages; today’s mortgages have more choices than Baskin Robbins.
One of the primary decisions you will have to make is whether you prefer a fixed rate mortgage or an adjustable rate mortgage. Fixed rate loans usually carry higher rates than adjustable rate loans. The reason for this is that the bank is taking a risk if interest rates rise and your loan is not making as much as newly granted loans. So they have to build in a cushion in case of increased rates.
Fixed rate home loans usually are better since the borrower protects himself against interest rate rises. But there are instances when this is not a good idea, for example if you are not going to live in your house for a long period. It will take at least five years to level out the higher initial interest rates.
Anyone who thinks they will be in their home for less than 10 years is probably better off with the lower, adjustable rate mortgage. The payments will be lower with an variable rate mortgage, and even though you have the risk of higher rates, you would have that when you sold the house anyway.
To confuse the borrower more, he now has to choose not only whether he wants a fixed or variable rate, but also the index upon which the rate will be based, and what the interest rate cap and maximum interest rate will be.
Another optionthe borrower will be offered is a lock in period. The lock in period is a device that permits you to lock in for a rate and keep it at that level for a certain period. The longer the lock in period, the more the interest rate will be.
A buyer also has to decide upon how much to put down. This is often not a big decision, since most buyers have a difficult time making the smallest down payment. In some instances, 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.
The next choice a borrower has to decide upon is how many points he wants to pay in order to lower the interest rate. This is another case where it may not be worthwhile unless the mortgage is going to be held for a time.
Pity the poor home loan borrower these days, with all these choices to make. Plus new types of mortgages, such as interest only, interest rate option ARMS and more new ones coming on the scene every day.
