Choosing the Best Mortgage
Picking the right mortgage is very important as is keeping an eye on the mortgage market and your mortgage lender once you have one. It is estimated that last year over 16 BILLION dollars was paid in unnecessary fees and interest to mortgage lenders, so it really pays to be vigilent!
When it comes to picking the best mortgage it often pays to keep it simple and honest and to demand the same from your mortgage lender.
What Type of Mortgage is Best?
With so many different types of mortgage out there it is easy to get confused as to which would be the best mortgage for you. In reality however, there are really only two basic types of mortgage and all other mortgages are some variant of these. Some of these variants do offer benefits under particular circumstances but you should always be wary as they often have a sting in the tail and rarely offer long term benefits over a simple basic mortgage. Ulimately you must select the best mortgage for you based on your own personal circumstances and requirements, but to help here are some details of the two main types of mortgage and some of their variants.
Fixed Rate Mortgages
Fixed Rate Mortgages have their interest rate fixed for a specific period or for the entire lifetime of the mortgage. Whether this is the best mortgage choice is dependant on how long you intend to live in your new home. The reason lenders can offer fixed rate is because they take out an insurance policy that covers them against fluctuations in interest rate. The downside is that you pay for this policy somewhere in the mortgage and if you refinance or sell after only a few years, you lose the benefit of a policy you have already paid for. If you take out another fixed rate policy, you'll have to pay it again. This insurance charge is why most fixed rate policies are 1%-2% more expensive than ARMs.
Fixed Rate Mortgages - Best Features
- Predictability - The rate will remain constant through-out the term of the mortgage and can be easily budgeted for
- Protection against Interest Rises - Protection against interest rate rises.
Fixed Rate Mortgages - Worst Features
Given that on average most people end up refinancing after only 2 years and only stay in their homes for seven years it can be seen why Adjustible Rate Mortgages are becoming more popular.
- Cost More - Fixed Rate Mortgages are typically more expensive than Adjustable Rate Mortgages.
- Locked In - Unless you have a fixed-rate variant that gives you the option of adjusting your rate downwards, you can end up locked into rates higher than the market is offerrng.
- Insurance Loss - If you sell or refinance you must absorb the cost of the insurance policy, AGAIN.
Adjustable Rate Mortgages (ARM)
Adjustable Rate Mortgages have their interest 'pegged' against an index that represents the general level of interest rates. There is normally a fixed margin applied to give the 'mortgage' rate. The payments on this kind of mortgage can fluctuate as interest rates change, however the maximum rate increase for ARMs is now set at 5% by law in the US. Here are the ky features of Adjustable Rate Mortgages.
- Discount Rates These starting rates are often 1-4% below that of more traditional 30yr fixed rate mortgages.
- Adjustment Intervals This is a shedule of regular times throughout the life of the mortgage that the interest rate can be adjusted.
- Index The index against which the interest rate for the mortgage is pegged.
- MarginThe margin above or below the index at which the mortgage rate is set. This is normally fixed.
Adjustible Rate Mortgages are becoming increasingly popular and the mortgage industry is continuously inventing new variants of this kind of mortgage. Generally these are the best mortgage when funds are a little tight and you know you do not intend staying in you new home for the long term. The downside is that you carry additional risk of the mortgage rate rising. Here is an important warning about SOME adjustable rate mortgages, the payments on some of these mortgages can end up LESS than is sufficient to meet the interest and the balance is added to the principle. This is known as negative amortization and can mesh you in a very nasty mortgage trap. For more information see Mortgage Mistakes to Avoid.
Adjustable Rate Mortgage ( ARM ) - Best Features
- Generally lower cost than fixed rate mortgages
- Rates fall automatically if interest rates fall
Adjustable Rate Mortgage ( ARM ) - Worst Features
- Risk of payments increasing as interest increases
- Several variants can end up trapping borrowers in the negative amortization snare.
Negotiating The Best Mortgage
Selecting the best mortgage for you will boil down to your personal circumstances. Once you have decided on which kind of mortgage is likely to suit you most, achieving the best mortgage will then be up to your ability to negotiate the very best Terms for your mortgage.
Here are some tips to help you negotiate the mortgage deal.
- Do Your Research and understand your needs - see Mortgage Buying Ideas
- Read Mortgage Mistakes to Avoid.
- Forewarned is fore-armed - Read Mortgage Tricks & Traps
- Get your credit report and clean it up as much as possible before approaching lenders
- Get YOUR attitude straight. It is your financial freedom at stake. Loan officers make big bucks from the deal, demand and expect honesty, forthrightness and a good deal. If you cannot get it from one, go find another.