Confused By All The Types of Home Loans?
Once you begin shopping for a mortgage, you will quickly learn there is a mind boggling assortment of types of mortgages.
First of all, today’s borrower has to choose between fixed and adjustable rate mortgages. A fixed rate mortgage will usually be at a higher rate than a variable rate mortgage. Banks want to be compensated for taking the risk that rates will rise after they have fixed your rate. To make up for this risk, they will require more money in the form of a higher interest rate.
Fixed rate mortgages usually are better since the borrower has protection against interest rate increases. 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. A good guideline is that you will require at least 5 years to make up the difference in the rates.
If you feel you will not be in the same home for at least ten years, the adjustable rate market may be a better choice. The chance of a higher adjustable rate is not there, since you will be selling the house and would face that risk if you got a new loan anyway.
In addition to deciding on an ARM (adjustable rate mortgage), these days you have to decide upon the index that will be used 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 want a lock in period. This will fix the interest rate for a period of time. The rate on the mortgage will be influenced by the lock in period, since a longer lock in rate means a higher interest rate.
The next issue a home buyer has to decide upon is the size of his down payment. This is often not much of a decision, since most buyers have a difficult time making the minimum down payment. But there are people with assets that can be liquidated to use as a down payment, and they have to decide about using them for a down payment, or leaving it to continue growing or earning interest.
A borrower will also have to decide on the points he wants to pay to lower the mortgage loan rate. 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.
Today’s mortgage borrower has a lot of issues to consider. Plus new types of loans, such as interest only, interest rate option ARMS and more new ones coming on the scene every day.
If you have questions about the right type of mortgage loan for your circumstances, contact us. We’ll be happy to talk over your options with no obligation, or put you in touch with a professional mortgage broker who can help.