Gone are the plain vanilla days of traditional mortgages; today’s mortgages have more flavors than Baskin Robbins.
A borrower today has to decide 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 taking the risk that rates will rise after they have fixed your rate. To do this, they want to earn more interest on the actual rate.
In a lot of cases, a fixed rate mortgage is a better choice because of the interest rate protection it gives the borrower. But there are instances when this is not a good idea, for instance if you are not going to live in your home for too long. Paying the increased rate of interest in the beginning will be costly if you only own for five years or so.
Anyone who believes they will be in their home for less than 10 years is probably better off with a lower, adjustable rate home loan. The payments will be lower, and since you will be paying down the mortgage relatively soon, you would have had higher interest rates in any case, if they occurred.
On top of the choice of fixed or adjustable rate mortgages, 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 whether, and how long you prefer a lock in period. The lock in period is a device that allows you to sign up for a rate and maintain it at that level for a set period. The rate on the loan will be influenced by the lock in period, since a longer lock in rate will mean a higher interest rate.
Another choice in the home loan process is how much deposit to make. Most people put down whatever they can scrape together to qualify for the home loan. In some cases, however, those with cash to spare may have to make the comparison between the benefit of a higher down payment with the option of earning interest with another investment.
A borrower will also need to decide on the points he wants to pay to reduce the home loan loan rate. Paying up front points will not be worth it if the loan is not going to be outstanding for a very long time.
How can the poor home buyer decide among all of the options? Add to these choices the other new loan products available now, such as interest only loans, or ARMS based on interest rate options, and you will really need an advanced degree to understand what you are getting into.
|
|