Choosing the Right Mortgage Can Be Confusing
Gone are the plain vanilla days of old fashioned mortgages; today’s mortgages have more choices than Baskin Robbins.
The world has evolved, and now a hopeful borrower has to choose among different kinds of home loans, such as fixed or variable rate. Fixed rate mortgages usually carry higher rates than adjustable rate loans. Lenders want to be compensated for taking the risk that rates will increase after they have fixed your rate. So they have to build in a cushion in case of higher rates.
Despite the higher level, many borrowers prefer a fixed rate, since then they will be protected against an jump in interest rates. But for it to be advantageous, you should plan on having your home for ten or more years. If the home will only be owned for about five years, the higher rate will not amortize over the loan.
To keep your mortgage payments down, and if you feel you will sell the house in a few years, the best option is to secure an adjustable rate mortgage. The risk of a higher adjustable rate is less, since you will be selling the home and would face that risk if you got a new loan anyway.
On top of the choice of fixed or adjustable rate mortgages, banks now offer more choice (some say confusion) with loans based on various indices, various adjustment caps and maximum rates.
Lenders will also offer borrowers a lock in period, so it is important to know how soon you are going to be purchasing your house. The lock in period is a device that allows you to sign up for a rate and maintain it at that level for a certain period. The rate will be decided by the length of the lock in period-the longer the period, the higher the rate.
A buyer also has to decide upon how much to deposit. In many 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 cash 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.
Lenders will also give you the choice of paying points to lower the interest rate on the loan, and it is up to you to decide if the paying the additional points will be worthwhile. How long a home loan is held will be a big factor here as well, because the price of the points has to be distributed out over the term of the loan.
Deciding among all of these options can really make your head spin. Add to these choices the other new loan products available now, such as interest only loans, or ARMS based on interest rate options, and you will really wish you had an advanced degree to understand what you are getting into.
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