Understanding the Many Home Loan Types

Not all mortgages are created equal, and once you start shopping for a mortgage, you will quickly learn that there is a mind boggling assortment of types of mortgages.

Today's home buyer has to choose, first of all, between fixed and variable rate mortgages. Keep in mind that fixed rates are usually higher than adjustable rates. This is because the banks have to make up for the fact that interest rates may move against them. So the banks have to build in a cushion in case of increased rates.

Fixed rate mortgages typically are better since the borrower has a protection against interest rate rises. But, if you do not plan on owning your home for a very long time, they may not be the best choice. Paying the increased rate of interest in the beginning will be expensive if you only own for five years or so.

To keep your mortgage payments lower, and if you feel you will sell the house in a few years, the best route is to secure an adjustable rate mortgage. 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.

In addition to deciding on an ARM (adjustable rate mortgage), these days you have to decide upon the index that will be used for the rate adjustment mechanism, and understand the rate adjustment cap (how many times and at what top percentage the rate can move) as well as the maximum interest rate.

Lenders in addition offer borrowers a lock in term. The lock in period is a device that permits you to sign up for a rate and maintain it at that level for a set 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 a down payment. This is often not a big decision, since most buyers have a difficult time making the minimum down payment. In some cases, however, those with funds 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.

The next option a borrower has to decide upon is how many points he wants to pay so that he can lower the interest 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 these options? And new choices come on the market all the time, like interest only loans and option based loans, adding even more confusion to the home mortgage process.
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