Don’t Be Confused- Understand All of the Mortgages Now Available
Gone are the plain vanilla days of old fashioned mortgages; today’s mortgages have more flavors than Baskin Robbins.
A borrower today has to choose if he wants a home loan with a fixed or adjustable interest rate. Keep in mind that fixed rates are usually higher than adjustable rates. Banks want to be compensated for assuming the risk that rates will rise after they have fixed your rate. So they have to build in a cushion in case of increased rates.
Fixed rate mortgages typically are better since the borrower protects himself against interest rate rises. But for it to pay off, you should plan on owning your home for ten or more years. It will take a minimum of five years to make up for the higher initial interest rates.
Anyone who thinks they will be in a home for less than 10 years is probably better off with the lower, adjustable rate home loan. The chance of a higher adjustable rate is not there, since you will be selling the home and would face that risk you got a new mortgage anyway.
On top of the choice of fixed or adjustable rate mortgages, banks now offer more choice (some say confusion) with mortgages based on various indices, different adjustment caps and maximum rates.
Lenders in addition offer borrowers a lock in period. This will hold the interest rate for a length of time. This will alter the interest: longer lock in rates are at a premium.
Another choice in the mortgage process is how much down payment to make. This is often not a big decision, since most buyers have a difficult time making the minimum down payment. If you are one of the fortunate ones with cash to spare, however, you have to make the comparison between how much the additional funds would earn in comparison with the benefit they gain for the mortgage interest rate.
Lenders will also give you the option of paying points to lower the interest rate on the mortgage, 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 in this case as well, because the price of the points has to be distributed out over the term of the mortgage.
Pity the poor home loan borrower today, with too many choices to make. With all of these types of loans, and new ones being brought on the market almost every day, such as interest only loans and options based loans, it is not surprising today’s borrower is confused.
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