Not all home loans are created equal, and once you start looking for a mortgage, you will quickly find that there is a mind boggling assortment of types of mortgages.
A borrower today has to choose if he wants a home loan with a fixed or variable interest rate. Fixed rate loans usually carry higher rates than adjustable rate loans. Lenders want to be compensated for taking the risk that rates will rise after they have fixed your rate. So the banks have to build in a cushion in case of increased rates.
Fixed rate home loans usually are better since the borrower protects himself against interest rate rises. But, if you do not plan on owning your house for a very long time, they may not be the best choice. Paying the higher rate of interest in the beginning will be expensive if you only own for five years or so.
Anyone who believes they will be in a home for less than 10 years is probably better off with the lower, adjustable rate mortgage. Adjustable rate loan payments are lower and future higher rates are not an issue, since when the loan is paid off, this situation would be the same.
On top of the decision between of fixed or adjustable rate loans, banks now offer more choice (some say confusion) with loans based on various indices, various adjustment caps and maximum rates.
Lenders also offer borrowers a lock in term. This will hold the interest rate for a length of time. The longer the lock in period, the more the interest rate will be.
Another choice in the home loan process is how much deposit to make. Most people put down whatever they can get together to qualify for the home loan. But many people do have additional cash, and they have to decide if other investment choices 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 mortgage, and it is up to you to decide if the paying the additional points will make it worthwhile. This is another time where it may not be worthwhile unless the mortgage is going to be held for a while.
How can the poor home buyer decide among all of these options? Add to these choices the other new mortgage products available today, 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.
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