Confused by So Many Types of Home Loans to Choose Between?
It was simple in the old days: you went to a bank for a home loan, put down a deposit, and walked away with a thirty year loan at a fixed rate. The...
It was simple in the old days: you went to a bank for a home loan, put down a deposit, and walked away with a thirty year loan at a fixed rate.
The world has evolved, and now a potential borrower has to choose among different types of mortgages, such as fixed or variable rate. A fixed rate loan will usually be at a higher rate than a variable rate mortgage. This is because the lenders have to make up for the fact that interest rates may move against them. For this, they expect to earn more interest on the initial rate.
If you can afford the higher interest rate, a fixed rate home loan makes sense since you now have protection against increasing interest rates. However, if you do not plan on owning your home for a very long period, they may not be the best choice. It will take a minimum of five years to level out the higher initial interest rates.
To keep your mortgage payments down, and if you feel you will sell the house in a few years, the best route is to secure an adjustable rate mortgage. Adjustable rate mortgage payments are lower and future higher rates are not an issue, since when the loan is paid down, this situation would be the same.
On top of the choice of fixed or adjustable rate loans, lenders now offer more choice (some say confusion) with loans based on various indices, various adjustment caps and maximum rates.
Lenders in addition offer borrowers a lock in term. The lock in period guarantees a given rate for a fixed time. The rate on the mortgage will be influenced by the lock in period, since a longer lock in rate will mean a higher interest rate.
The next issue the buyer has to decide upon is the size of his down payment. In a lot of cases, there is not much to decide upon, since the buyer will deposit as much as he can afford. In some instances, 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 have to decide on the points he wants to pay to reduce the home loan loan rate. The length of time you will hold the mortgage will be an important deciding factor.
How can the poor borrower decide among all of these options? With all of these types of loans, and new ones being brought on the market almost every day, such as interest only loans and options based loans, it is no wonder today’s borrower is confused.
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