You have a lot of choices to make in buying a house and deciding upon a home loan, and in today’s confusing loan world, you now also have to decide upon the index that you want for your Adjustable Rate Mortgage (ARM).

The index of an ARM (Adjustable Rate Mortgage) is the financial standard upon which the adjustments will be made. Indices used include the CD rate, the Treasury Bill rate, the Fed Funds rate, the LIBOR rate and, the new kid on the block, the options ARM.

The basic concept of an ARM is that the interest on the loan is adjusted up or down, periodically, based on a chosen signal interest rate that is indicative of interest rates in general. One such instrument would be Certificates of Deposit-your loan rate would go up and down with the CD rate. Adjustable rate mortgages have adjustment caps, which says that the interest rate can only be adjusted at certain periods, even if the underlying interest rate goes up more often; this can be an advantage if you just readjusted and then rates move up. But be aw are, however, that if you just readjusted at a higher rate, and your index rate falls, you are stuck with the higher rate until the next adjustment period.

ARMs can be tied to a lot of underlying instruments, such as the 90 day U.S. Treasury Bill. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. Many of the international lender will use the LIBOR as the index rate for loans.

How you decide upon the right index is dependent upon your particular circumstances and how you believe interest rates will change. CD ARMs adjust every six months, for example, and therefore react more readily to interest rate changes. Rates on Treasury instruments such as the Treasury Bill change more slowly than CDs, and so will react more less to interest rate changes. LIBOR is the index that moves the most often and the most rapidly, so if you want to take frequent advantage of the downward level of lowering rates, this is the one for you.

But in addition to these standards, new products are always been introduced on the mortgage market; an example would be the option ARM, that will let a borrower decide how much mortgage he is going to pay each month! The options that are offered represent interest-only payments, and a minimum payment that can’t be less than the interest-only payment. Be warned that minimum payment option can result in an increasing, rather than decreasing mortgage, a phenomenon known as negative amortization.

There are so many choices in the home mortgage market today that the new home buyer should not attempt to cover this field by himself but should instead call a certified mortgage consultant.

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

The world has changed, and now a hopeful borrower has to choose between different types of mortgages, such as fixed or variable rate. Fixed rate mortgages usually carry higher rates than variable rate loans. There is a chance of the rates going higher, increasing the bank’s cost of money when they fix a rate for a long period. So they have to build in a cushion in case of increased rates.

If you can afford the higher interest rate, a fixed rate home loan makes sense since you now have protection against rising interest rates. But for it to be advantageous, you should plan on having your home for ten or more years. If the home will only be owned for five or so years, the higher rate will not amortize over the loan.

If you feel you will not be in the same home for ten years or so, the adjustable rate market is probably a better choice. Adjustable rate loan payments are lower and future increased rates are not an issue, since when the loan is paid down, this situation would be the same.

To confuse the borrower more, he now has to pick not only whether he wants a fixed or variable rate, but also the index upon which the rate will be determined, and what the interest rate cap and maximum interest rate will be.

Lenders will also offer you a lock in period, so it is that you know how soon you are going to be buying a house. The lock in period is a device that permits you to lock in for a rate and maintain it at that level for a set period. The longer the lock in period, the higher the interest rate will be.

Now you have to decide upon a down payment. In many cases, there is not much to think about, since the buyer will put down as much as he can afford. If you are one of the fortunate ones with cash to spare, however, you have to make the comparison between how much the additional funds would earn in comparison with the benefit they gain for the mortgage interest rate.

The next option a borrower has to decide upon is how many points he wants to pay so that he can lower the interest rate. How long a mortgage is held will be a big factor here as well, because the cost of the points has to be spread out over the term of the loan.

Pity the poor home loan borrower these days, with too many choices to make. And new choices come on the market all the time, like interest only loans and option based loans, giving us even more confusion in the home loan process.

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There is not a great deal of difference between first and second mortgages except that one is usually taken out when a home is bought, and the other is taken out on the remaining balance of the first home loan.

Usually, homeowners will take out a second mortgage to undertake some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate consumer debt.

If you are thinking about taking out a second mortgage for home improvements, you should make sure you are going to get that additional value. Adding a bedroom, or renovating a kitchen are projects that have proven to make a home more valuable since these are items that new home buyers look for.

Some home improvements, however, are nothing more than luxuries and will not affect the future value. An in ground pool is an example that is frequently used, since there are many buyers (with young children, for instance) who would not care to have one.

Reducing high interest rate debt is another good use for a second mortgage, as long as you are able to keep your total costs down. Typically, a homeowner would want to pay down consumer debt, such as credit card debt that may have interest rates of 16-20% with the proceeds from a second mortgage, which may have a rate of 5-9%.

But be sure you use the loan for its intended purpose, and don’t “forget” to pay down those expensive consumer loans.

Second mortgages are just that in actuality as well as in name, because they are paid down after the first home loan is paid, and the lender has to hope there is equity to cover it.

For this reason, rates on second loans are higher because the bank has that risk, and the chance of default is higher.

Second mortgages have closing expenses, so you should be careful about them and make sure that they do not render the second mortgage so expensive that it does not balance out the savings you believed you would have.

Since a first mortgage is for a substantial portion of the value of the home, it is for a greater amount than a second mortgage, so the closing costs are spread over a greater amount. The effect of the closing costs on a smaller second mortgage can be significant. It is also important to shop around for a second mortgage since rates on these mortgages can be very different from bank to bank.

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