by Irene A. Maccini

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.

One of the primary decisions you will have to make is whether you prefer a fixed rate loan or an adjustable rate mortgage. A fixed rate loan will usually be at a higher level than a variable rate loan. There is a chance of the rates increasing, increasing the bank’s cost of money when they fix a rate for a long period. To compensate for this risk, they will require more money in the form of a higher interest rate.

In a lot of cases, a fixed rate home loan is the better choice because of the interest rate protection it gives the borrower. But for it to be advantageous, you should plan on owning your home for ten or more years. If the house will only be owned for five or so years, the higher rate will not amortize during the loan.

Home buyers who feel they will not own the house for as long as ten years should think about an adjustable rate mortgage. Adjustable rate mortgage payments are lower and future increased 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, banks now offer more choice (some say confusion) with mortgages based on various indices, various adjustment caps and maximum rates.

Another choicethe borrower will be offered is a lock in period. The lock in period means a given rate for a certain time. The rate will be decided by the length of the lock in period-the longer the period, the more the rate.

A buyer also has to decide upon how much to deposit. In many cases, the choice is merely made by how much the home buyer has been able to save up. In some cases, however, those with funds to spare may have to compare the benefit of a higher down payment with the option of earning interest with another investment.

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. How long a home loan is held will be a big factor in this case as well, because the cost of the points has to be spread out over the term of the mortgage.

Choosing among all of these options can really make your head spin. 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 not surprising today’s borrower is confused.

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