First time buyers face a potential dilemma that could plague them for the rest of their mortgage lives. The problem lies with the various terms available in the market place, and the perception that rates may go down. The term of a mortgage is the period of time over which both the payment and rate are guaranteed. You may elect to take a six month, a one year, two year, three year, four year, five year term or even longer. During the chosen term, the payment will stay stable (on a normal mortgage). The shorter the term, the lower the rate, and of course the lower the payment. Most Consumers will elect to take a short term mortgage for that reason. At the present time a six month convertible mortgage runs at 8.25%, while a five year term mortgage stands at 9.375%. To the uninitiated, on a $130,000 mortgage, the payment differential is almost $100 per month ($1108 versus $1013). The jump from rent to home ownership will mean that most first timers will choose the cheaper method. That may not be the wiser choice. If you start with the least expensive payment, that decision will probably dictate you continuously choosing six month terms from now on, simply because once you become a home owner, other expenses won't let you make the jump from the cheaper payment (six month term) to the more expensive payment (five year term). Most first time buyers should choose a five year term or greater, in order to protect against increased demand on cashflow.

If you wish to play the rate game, the following scenario should satisfy both your desire to gamble, and the necessity to guard against excessive payments. For ease of understanding, let's use the same example as above.

You need a first mortgage of $130,000. Figure out which lending institution will have the opportunity of handling your mortgage. This institution will carry a six month or one year convertible product, with the privilege of conversion to a five year term anytime within the first term. The payment you choose will be the payment associated with the present five year term rate. In our example, the rate being 9.375%, the figure is $1108 per month. You must deposit that amount into a dedicated bank account each and every month until you have converted your mortgage to the five year term. The lender will only take out $1013 from that account because the rate for the first 6 months (or one year) is at 8.25%. Don't touch the remainder. When you decide that the rates have hit bottom, you must immediately correspond with your lender to have them lock in the rate for the longer term. At that time, whatever balance remains in your dedicated bank account can go as a prepayment against the principal outstanding. In other words, if your choice for conversion was in 8 months, the balance left over in your bank account will be $760 (that's $1108 less $1013 = $95 X 8). That whole amount should be presented to your lender on conversion. Hopefully, when you convert, the five year rate will be equivalent or lower than it is today. Since you have been putting the higher amount in your bank each month, when you do decide to opt for the five year rate, the new payment will resemble the old payment so there will be little or no increase in cashflow.

A little homework and preparation now will allow much more options down the road.