Choose a mortgage

You probably think that choosing which home to buy is the most important decision in the home buying process. But unless you have a few hundred thousand dollars in cash, you will need the financial assistance of a mortgage.

Choosing the mortgage is just as important as choosing the home because you will be stuck paying the mortgage as long as you own the home. If you sign on a mortgage with bad term and rates, you will wish you never bought a home.

The article, “Choosing Between Mortgages,” posted on totalreturnannuities.com, provides some insight into basic mortgages.

“Most mortgages are made for 15 or 30 year loans. That can be a long time to be tied down to a payment. The loan applicant will need to take into consideration how much money they can qualify to borrow, how much they have to set aside for payments and whether they are comfortable taking a risk with a variable interest rate loan.”

Most consumers want to be able to receive the lowest interest rate throughout the life of the loan. This is the disadvantage of a fixed rate mortgage.

The interest rate remains constant at whatever the prime rate was when the loan was originated, for the duration of the loan; with a fixed rate mortgage.

On the other hand, a variable, or an adjustable rate loan is flexible. “A variable rate mortgage loan offers more flexibility but also more risk. With a variable interest rate loan, the consumer will be able to take advantage of lower interest rates if the prime rate falls. This can be a substantial amount of savings over the course of the loan. There is a risk, however that the prime rate will rise, which means the homeowner will be paying more money in interest on the mortgage loan. The fixed rate consumer does not have this concern.”

There is cooperation between the fixed rate mortgage loan and the variable rate mortgage loan, however. A capped loan allows consumers access to lower interest rates if available, while protecting them from high interest rates above a predetermined limit.

Another compromise is a discounted mortgage. With a discounted mortgage, the consumer takes out a mortgage for an adjustable interest rate loan. While the interest rate will fluctuate along with the prime rate, the interest rate you pay will always remain a certain number of percentage points below whatever the current prime rate is.

While it is important for the consumer to shop around for the best interest rate, the lowest interest rate is not always the best. The interest rate may be as much as a few points below what other lenders have offered.

Consumers should be aware, however that this low interest rate may come with a high price tag. In order to makeup for the lost revenue of the low interest rate, lenders will include restrictions and penalties in the terms of the loan.

A common fee associated with lower interest rates are points. One point is equal to one percent of the entire amount of the loan. For example, if you are charged one point on a $100,000, you will be required to pay an extra $1,000 upfront.

“Finally, lenders may try to make up the difference by requiring the consumer to purchase home insurance through them, rather than allowing them to shop around for competitive rates. Provided there are no requirements or penalties attached to a low interest rate, it can be quite advantageous for a consumer to shop around before making a final decision on a lender.”

There are several things to consider when choosing a mortgage. The best thing to do is to do some homework and have as much information as possible about a variety of mortgages before meeting with your lender.

This will also help protect you from predatory lending practices.

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