Understanding The New Mortgage Options

May 27, 2010 on 6:27 am | In online insurance | Comments Off

No longer do we have the plain vanilla days of traditional mortgages; today’s mortgages have more flavors than Baskin Robbins.

The world has evolved, and now a potential borrower has to choose between different types of home loans, such as fixed or variable rate. A fixed rate loan will usually be at a higher level than a variable rate loan. The reason for this is the banks have to make up for the fact that interest rates may move against them. So they try to make more interest at the outset.

Fixed rate home loans usually are better since the borrower protects himself against interest rate rises. But, if you do not plan on owning your house for a very long time, they may not be the best choice. If the house will only be owned for about five years, the higher rate will not amortize during the loan.

Anyone who believes they will be in a home for less than 10 years is likely better off with the lower, adjustable rate home loan. The payments will be lower with an adjustable rate mortgage, and even though you have the risk of higher rates, you would have that when you sold the house anyway.

But now, to add more confusion to the home loan market, the borrower has to choose the index that his adjustable mortgage will be based on, what the adjustment cap should be and what the maximum interest rate will be.

Another choice to make is if, and how long you want a lock in period. The lock in period means a given rate for a certain time. This will change the rate: longer lock in rates have a premium.

A buyer also has to choose how much to put down. In many cases, there is not much to think about, since the buyer will deposit as much as he can afford. But some people do have additional funds, and they have to decide if other investment options would be a better use of those funds.

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. This is another case where it may not be worthwhile unless the loan is going to be held for a while.

How can the poor home buyer decide among all of the options? Plus new types of mortgages, such as interest only, interest rate option ARMS and more new ones arriving every day.

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