Lenders limit the amount the rate can rise, often to no more than two points a year, with a lifetime cap of six points. The longer the fixed period, the higher the rate. The idea is to match the loan to the amount of time planned in owning the house. For instance, buyers who expect to move after three years, a 3-1 is a great option. Figuring out which kind of loan makes sense depends entirely on an individual buyers circumstances and temperament.
Many factors go into the financial institution's lending decision process.
A lending institution begins by examining work history, as well as credit history. The most important thing a lender looks at, however, is a buyer's ability to meet the financial obligation to them by looking at income and debt levels. The first is just the percentage of gross monthly income needed to spend on housing expenses after purchase. It includes mortgage payment, taxes, insurance and maintenance. The total-obligation ratio, meanwhile, is the portion of a buyer's income that goes to covering both housing expenses and any other obligations, such as credit cards, car loans and child support.