Choosing the Best Mortgage is Confusing
It was simple in the old days: you went to a bank for a home loan, put down a down payment, and walked away with a thirty year loan at a fixed rate.
One of the first decisions you will have to make is whether you prefer a fixed rate mortgage or an adjustable rate mortgage. A fixed rate loan will usually be at a higher rate than a variable rate mortgage. There is a chance of the rates going higher, increasing the bank’s cost of funds when they set a rate for a long period. So they have to build in a cushion in case of increased rates.
Despite the higher level, many home buyers prefer a fixed rate, since then they will be protected against an jump in interest rates. However, if you do not plan on owning your home for a very long time, they may not be the best choice. Paying the increased rate of interest in the beginning will be costly if you only own for five years or so.
Home buyers who feel they will not live in the house for as long as ten years should think about an adjustable rate mortgage. Adjustable rate loan payments are lower and future increased rates are not an issue, since when the loan is paid off, this situation would be the same.
To confuse the borrower even further, he now has to pick 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.
Lenders will also offer you a lock in period, so it is important to know how soon you are going to be buying a house. This will hold the interest rate for a period of time. This will alter the interest: longer lock in rates have a premium.
The next thing the buyer has to decide on is the size of his down payment. This is often not a big decision, since most buyers have a difficult time making the minimum down payment. But some people do have additional funds, and they have to decide if other investment choices would be a better use of those funds.
Another choice facing borrowers is the number of points to pay. This is another case where it may not be worthwhile unless the mortgage is going to be held for a while.
How can the poor home buyer decide among all of these options? Plus new types of loans, such as interest only, interest rate option ARMS and more new ones arriving every day.
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