How to Understand Mortgages Before You Take Out a Loan. - By: Scott Staudt

There are many types of home loan to choose from nowadays. Choice is good, but this many choices may be confusing.

Before you begin to negotiate a mortgage, understand all of the various choices available.

One of the first choices a borrower will face is whether he wants an ARM or a FRM. An FRM is a fixed rate mortgage and an ARM is an adjustable rate mortgage.

Even if you choose a FRM, you will have types within the category to choose.

Likewise, there are variations on types of ARMs. There should almost be a college course in understanding all of the different kinds of ARMS.

You may also be offered the option of an interest rate only mortgage, although these are becoming more rare.

Now you need to decide on whether you want to pay points, and if you do, how many? Usually the time you plan on remaining in your home will influence the decision on points.

One of the only decisions that is not a new one is how much of a down payment should be made. If you are fortunate enough to have a lot of funds for a down payment, should you put down as much as you can as a deposit, or will you fare better if you keep it lower and invest the remainder?

Then you will be asked if you want to have a prepayment clause in your mortgage terms. This is a pretty easy choice if you know you do not plan to own the house for a very long time and want to pay off the mortgage early.

Next choice concerns a lock in rate. Locking in a rate is usually a good idea, unless the rates go down after you have fixed your rate. You may be stuck with the higher rate even though other mortgages are available at lower rates. There is usually a way to opt out of a lock in rate, but the lender will have a fee for this. If you feel strongly that rates are increasing, or you just don't want to be concerned about predicting rates, take a lock in option.

Before you start to shop for a mortgage, look into all of these choices and have a good idea of which will work the best in your situation. This will make the negotiations with your lender much easier and more profitable for you.

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