In bygone days, there was basically only one type of home loan, a conventional, fixed rate, term mortgage.

Today’s borrower has to choose, first of all, between fixed and adjustable rate mortgages. Keep in mind that fixed rates are normally higher than variable rates. This is because the banks have to make up for the fact that interest rates may move against them. To do this, they want to earn more interest on the initial rate.

Fixed rate home loans typically are better since the borrower protects himself against interest rate rises. They are not the best choice, however, if you do not plan on owning the property for too long. A guideline is that you will need at least 5 years to make up the difference in the higher rate.

If you think you will not be in the same home for ten years or so, the adjustable rate market is probably a better choice. The mortgage will be lower, and since you will be paying off the mortgage relatively soon, you would have had higher interest rates in any case, if they occurred.

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 top percentage the rate can move) as well as the maximum interest rate.

Another choicethe borrower will be offered is a lock in period. This will fix the interest rate for a period of time. The longer the lock in period, the higher the interest rate will be.

The next issue the buyer has to decide on is the size of his down payment. In many cases, the choice is merely made by how much the borrower has been able to save up. But there are those with assets that can be liquidated to use as a deposit, and they have to decide about using them for a deposit, or leaving it to continue growing or earning interest.

Another choice facing borrowers is how many points to pay. Paying up front points will not be worth while if the loan is not going to be outstanding for a considerable time.

How can the poor home buyer decide among all of these options? Add to these choices the other new loan products available now, such as interest only loans, or ARMS based on interest rate options, and you will really need an advanced degree to understand what you are getting into.

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