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Friday, February 20, 2009

Owning your first house and you need a Bond, What are my options?

By Graham McKenzie

If you wish to take out a bond than you have several options you must consider. For beginners, you need to understand the two major types of bonds, which are fixed rate interest bonds and bonds that constantly fluctuate the interest.

Fixed rates are old-fashioned and popular among citizens including home owners, who want to have a bond with a consistent price. They would rather just pay up-front a fixed fee instead of deal with a fluctuating rate.

Fixed rate bonds range in duration from twenty to thirty years, however some people bypass the norm by taking out a fifteen year bond. This is possible if the individual has a higher than normal equity and enough income to meet the higher monthly payments.

Theoretically banks should tailor the loans around the customer's needs and concerns. I reiterate that theoretically it would be nice. Unfortunately banks are not willing to do business this way. They will only offer bonds based on five year increments and prefer a bond somewhere in the range of fifteen to twenty five years.

Others prefer bonds where the interest rate constantly is adjusted. This is smart because sometimes the interest rate is fixed to begin with and slowly will adjust over time. Banks are more inclined to stay flexible with individuals who take out loans with adjustable interest and will accommodate their needs.

Individuals also have the right to ask the band to adjust the interest rate of the bond. This scenario becomes viable when the market conditions improve and the high interest rate is not longer valid. The bank will obliged, but must charge a one time fee for this service.

However, you also run a risk of seeing a higher interest rate with bonds that fluctuate the interest. It's one of those up and down, rollercoaster rides. Like Forrest Gump said, "you never really know what you're gonna get."

A lot of people would rather avoid the risk of inflated interest rates, and instead turn to a fixed interest rate that they can depend on.

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