In bygone days, there was basically only one type of mortgage, a conventional, fixed rate, term mortgage.

The world has evolved, and now a hopeful borrower has to choose between different types of home loans, such as fixed or variable rate. Usually, a fixed rate loan will be at a higher rate than an adjustable rate mortgage. This is because the lenders have to make up for the issue that interest rates may move against them. To make up for this risk, they will ask for more money in the form of an increased interest rate.

In many cases, a fixed rate home loan is the better choice because of the interest rate protection it gives the borrower. But there are times when this is not a good idea, for instance if you are not going to live in your home for a long period. If the house will only be owned for five or so years, the higher rate will not amortize over the loan.

If you think you will not be in the same house for ten years or so, the adjustable rate market is probably a better choice. The risk of a higher adjustable rate is not there, since you will be selling the house and would face that risk you got a new mortgage 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 will also offer borrowers a lock in period, so it is that you know how soon you are going to be buying a house. This will hold the interest rate for a length of time. The longer the lock in period, the higher the interest rate will be.

Next you have to decide upon your down payment. Most people put down whatever they can get together to qualify for the mortgage. But some people do have additional cash, and they have to decide if other investment options would be a better use of those funds.

Lenders will also give you the option of paying points to lower the interest rate on the loan, and it is up to you to decide if the paying the additional points will make it worthwhile. How long a mortgage is held will be a big factor here as well, because the cost of the points has to be spread out over the term of the loan.

Today’s mortgage borrower has a lot of things to consider. 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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