In bygone days, there was really only one type of mortgage, a conventional, fixed rate, term mortgage.
A borrower today has to decide if he wants a home loan with a fixed or variable interest rate. Keep in mind that fixed rates are normally higher than variable rates. The reason for this is the lenders have to make up for the fact that interest rates may move against them. So they try to make more interest at the outset.
In a lot of cases, a fixed rate mortgage is the better choice because of the interest rate protection it gives the borrower. However, if you do not plan on owning your house for a very long time, they may not be the best choice. Paying the higher rate of interest in the beginning will be expensive if you only own for five years or so.
Anyone who believes they will be in a home for less than 10 years is probably better off with a lower, adjustable rate mortgage. The monthly mortgage will be lower with an adjustable rate mortgage, and even though you have the risk of higher rates, that would be the case when you sold the house anyway.
On top of the decision between of fixed or adjustable rate mortgages, lenders now offer more choice (some say confusion) with loans based on various indices, various adjustment caps and maximum rates.
Another choice to make is whether, and how long you want a lock in period. A lock in period will lock in the rate for a certain period of time. This will alter the rate: longer lock in rates are at a premium.
Now you have to decide upon your down payment. In many cases, there is not much to think about, since the buyer will deposit as much as he can afford. In some instances, however, those with funds to spare may have to compare the benefit of a higher down payment with the option of earning interest with another investment.
A borrower will also have to decide on the points he wants to pay to reduce the home loan loan rate. The length of time you will hold the mortgage will be an important determining factor.
Today’s mortgage borrower has a lot of issues to think about. Plus new types of loans, such as interest only, interest rate option ARMS and more new ones coming on the scene every day.
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