Confused by All of the Types of Mortgages to Choose Between?

It was simple in the old days: you went to a bank for a mortgage, put down a down payment, and walked away with a thirty year loan at a fixed rate.

Today's borrower has to choose, first of all, between fixed and adjustable rate mortgages. Fixed rate mortgages usually carry higher rates than variable rate loans. 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 compensate for this risk, they will require more money in the form of a higher interest rate.

If you can afford the higher interest rate, a fixed rate mortgage makes sense since you now have protection against rising interest rates. But for it to pay off, you should plan on having your house for ten or more years. A guideline is that you will need at least 5 years to make up the difference in the rates.

Anyone who thinks they will be in a home for less than 10 years is likely better off with the lower, adjustable rate home loan. Adjustable rate loan payments are lower and future increased rates are not an issue, since when the loan is paid down, this situation would be the same.

To confuse the borrower even further, he now has to choose not only whether he wants a fixed or variable rate, but also the index upon which the rate will be determined, and what the interest rate cap and maximum interest rate will be.

Another choice to make is whether, 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 certain period. The rate on the mortgage will be influenced by the lock in period, since a longer lock in rate means a higher interest rate.

Now you have to decide upon your down payment. In many cases, the choice is simply made by how much the borrower has been able to save up. 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 choice a borrower has to decide upon is how many points he prefers to pay so that he can lower the interest rate. The length of time you will hold the loan will be an important deciding factor.

Today's mortgage borrower has a lot of things to think about. Plus new types of mortgages, such as interest only, interest rate option ARMS and more new ones arriving every day.

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