How to Understand Mortgages Before You Borrow.

Written By: Stella B. Guin on February 8, 2010 No Comment

So many choices, so little time. With all of the choices out there, it is difficult for a home buyer to decide the best mortgage.

It is a good idea to understand every one of the products and how they work in your particular circumstances.

The first decision any home buyer has to make is whether he wants to obtains an FRM or an ARM. As the initials would tell you, an FRM is a home loan with a fixed rate and an ARM is a home loan with an adjusting rate.

Once you have chosen one, for example the FRM, you have lot of additional choices within that type of loan.

ARMS are even more complex in the various types kinds that are offered. You could study ARMs for weeks and not cover all of them.

You may be offered the choice of an interest only mortgage, where you only pay interest and no principal, but these are quickly disappearing from the scene in tight credit situations.

The next choice a borrower has is whether to use points to lower his loan rate. There are circumstances where this is the right choice, but you have to try to project how long you will be living in the home to make the correct decision.

A similar decision making method applies to the size of your deposit. Most people are limited by finances, but for those with ample funds, they have to decide whether investing part or using it all for a deposit is the wisest choice.

Another choice you may be offered is a prepayment clause. If you feel you want the privilege to pay the mortgage off earlier, you may decide to choose this option.

Next choice is concerning a lock in rate. Locking in a rate is usually a good idea, unless the rates go down after you have fixed your rate. If you lock in a rate and then rates fall, you may be burdened with an increased rate. You may, for a fee, though, have an option to cancel the rate agreement if the rates are better at the time of closing. Those who feel rates are going to increase, or those who simply don’t want to gamble on the interest rate market will usually opt for a lock in rate.

All of these loan features will make the choice of your mortgage more complicated, but it is critical to understand what features you are being offered. This will make the negotiations with your lender a lot easier and more profitable in the long run.

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