Travel Guides And Tips: How To Pick the Right Mortgage

Pick the Right Mortgage
Finding the right mortgage involves some digging. Interest rates, points, processing costs, and adjustment features all affect how well a mortgage suits your needs.

Mortgage lending is mechanical, impersonal and competitive. So hunt for the best loan -interest rate, points, processing costs and, on adjustable mortgages, the most favorable adjustment features. Don't pay much attention to who's originating the loan or where the lender is. And don't place too much value on your current bank or thrift relationship, either. Odds are your loan will be sold once or twice over its term.
The basics

There are two basic ways mortgage lenders charge you for using their money: through the interest charges you pay each month over the life of the loan, and through points. Compare mortgages by their annual percentage rates (APR), which include the cost of points and other fees.

Lenders market a wide variety of mortgages, but when you get down to it there are only two varieties:
a. Fixed-rate mortgages lock in your interest rate for the life of the loan. Your total monthly payment of principal and interest remains constant, but the portion of each payment allocated to principal grows. (See Pros and Cons of Fixed-Rate Loans.)

b. Adjustable-rate mortgages (ARMs) generally start lower than their fixed-rate cousins but their interest rates can rise -- or fall -- during the term of the loan. (See All about ARMs.)

What's best for you?

Deciding which mortgage is best requires a close look at your present circumstances, future earnings and financial goals.

Keep your needs in the forefront. Do you intend to stay put for many years? Then getting the best interest rate on a fixed-rate mortgage is probably your best bet. Paying 7.5% rather than 8% on a $100,000, 30-year fixed-rate mortgage will save you $34.55 each month.

On the other hand, say you plan to put the home up for sale in three to five years. Then points and closing costs (and the ability to pay off the mortgage without penalty) are more important than getting the absolute lowest available rate.

For most home buyers, the choices are these:

a. Will your down payment be small or large?
b. Do you want a long-term or shorter-term loan?
c. Do you want a fixed-rate or adjustable-rate mortgage?
d. Will you pay points for the lowest-rate mortgage or will you shop for a loan with few or no points and therefore a higher rate?

Your Choice

The market is flooded with different types of mortgages, but how do you know which one is right for you? The decision has to be yours, whether you take advice from an Independent Financial Advisor or do your own research.
What’s out there?

To start with, what sort of mortgage hunter are you and what are you looking for? If you are one of a group intending to take out a joint mortgage then your choices will be limited, but you will be able to find a lender and you will be able to find one that will allow a mortgage to be held in joint names by up to four people. The amount of such a mortgage will be calculated on three times the highest salary plus one times each of the other’s incomes. In today’s market you had better hope that at least one of you has got a really well paid job!
Repayment or interest only

Fundamentally there are two main types of mortgage: they are either repayment, where you pay back the interest and the capital lump sum that you borrowed each month or interest only, where you just pay back the interest and use a policy such as a life assurance policy or another investment fund product to pay off the loan at the end of the mortgage term.
Circles within circles

Within these broad principles there are a whole host of options. It is the proliferation of these options, sometimes called different things by different lenders, that gives the impression there are a confusing number of types of mortgage.

Which of these options is best for you depends on your attitude to risk and on how much spare cash you have each month as well as whether you want to aim to pay off your mortgage early or not.
Standard variable rate

If you like your life to be varied then this one is for you. The monthly repayments will change periodically roughly in line with the changes by the Bank of England in the Base Rate of borrowing. Each lender will have a different standard variable rate of interest, so shop around.
Capped

A capped mortgage is one where the interest rate on the monthly repayments cannot exceed a certain amount, so if the Base Rate climbs you will be protected from the higher end of the rate by the ceiling on the product. This is a good mortgage to choose if you are working to a budget on your monthly finances. The capped period usually is only for a few years, maybe between 1 and 5, after which it will either revert to the standard variable rate for that product or it will change to a different capped rate.

If you have been paying much under the base rate while in the capped period, in other words your repayments have been at their maximum for some time then you might find when that period ends that you face quite a hefty increase in repayments.

You also need to be aware of any tie-in penalties and how long this tie-in period lasts once the capped period has ended. Many products have these penalties which are designed to stop you transferring to another product as soon as you have finished the offer period.
Flexible

Flexible mortgages will allow you to pay off more than the required repayments each month without penalty and will also allow you to under pay if you need to and will have the facility for payment holidays. Most will also calculate interest on a daily basis. Some of these flexible mortgages are also off-set mortgages which will provide you with a bank account so the mortgage becomes like a huge overdraft that you gradually pay off over the loan period.
Fixed rate

And finally fixed rate mortgages are for those of you who like to know exactly what’s going on in your life. These will enable you to accurately budget your monthly finances as the rate won’t change for the fixed period. However, as with the capped mortgage you need to be aware of any penalty payments that might be applied once the fixed period is over.

There are other types of mortgage out there and with such a variety to choose from it will only be a matter of time before you find exactly what you are looking for.