It was simple years ago: you went to a bank for a mortgage, put down a deposit, and walked away with a thirty year loan at a fixed rate.

A borrower today has to decide if he wants a mortgage with a fixed or adjustable interest rate. A fixed rate loan will usually be at a higher level than a variable rate loan. The reason for this is the lenders have to make up for the issue that interest rates may move against them. To compensate for this risk, they will require more money in the form of an increased interest rate.

If you can afford the higher interest rate, a fixed rate home loan makes sense since you then have protection against rising interest rates. They are not the best deal, however, if you do not plan on owning the home for too long. A guideline is that you will require at least 5 years to make up the difference in the higher rate.

Anyone who believes they will be in their home for less than 10 years is probably better off with a lower, adjustable rate mortgage. Adjustable rate mortgage payments are lower and future increased rates are not an issue, since when the loan is paid off, this situation would be the same.

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

Another choice to make is whether, and how long you prefer a lock in period. The lock in period is a device that allows you to sign up for a rate and keep it at that level for a certain period. 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 on is the size of his deposit. This is often not a big decision, since most buyers have a difficult time making the minimum down payment. If you are one of the lucky ones with cash to spare, however, you must make the comparison between how much the additional funds would earn in comparison with the benefit they gain for the mortgage interest rate.

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 be worthwhile. This is another case where it may not be worthwhile unless the mortgage is going to be held for a while.

Choosing among all of these options can really make your head spin. And new choices come on the market all the time, such as interest only loans and option based loans, adding even more confusion to the home loan process.

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