Gone are the plain vanilla days of old fashioned mortgages; today’s mortgages have more flavors than Baskin Robbins.
Today’s home buyer has to choose, first of all, between fixed and adjustable rate mortgages. Normally, a fixed rate loan will be at a higher rate than an adjustable rate mortgage. The reason for this is that the bank is taking a risk if interest rates rise and your loan is not earning as much as newly granted loans. To do this, they expect to earn more interest on the actual rate.
If you can afford the higher interest rate, a fixed rate mortgage makes sense since you then have protection against rising interest rates. But, if you do not plan on owning your home for a very long time, they may not be the best choice. If the home will only be owned for five or so years, the higher rate will not amortize over the loan.
Home buyers who feel they will not own the home for as long as ten years should think about an adjustable rate mortgage. The payments will be lower with an variable rate mortgage, and even though you have the risk of higher rates, that would be the case when you sold the house anyway.
On top of the choice of fixed or adjustable rate loans, banks now offer more choice (some say confusion) with loans based on various indices, different adjustment caps and maximum rates.
Another choice to make is if, and how long you prefer a lock in period. The lock in period is a device that permits you to lock in for a rate and keep it at that level for a set period. This will alter the interest: longer lock in rates are at a premium.
Now you have to decide upon your down payment. Most people put down whatever they can get together to qualify for the home loan. But many people do have additional funds, and they have to decide if other investment options would be a better use of those funds.
The next option a borrower has to decide upon is how many points he wants to pay in order to lower the interest rate. This is another time where it may not be worthwhile unless the loan is going to be held for a time.
Deciding among all of these options can really make your head spin. Add to these choices the other new mortgage products available now, such as interest only loans, or ARMS based on interest rate options, and you will really wish you had an advanced degree to understand what you are getting into.
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