Whether you already have a mortgage or you plan to buy a house in the next year, here are seven mortgage tips for 2007
1. Review your mortgage _ does it still fit your circumstances? Interest rates change, children are born and grow up, sometimes you need to fix up the house and sometimes you need to move on. Life events can trigger changes in the way you pay for your house.
“Every year,” says Dan Hanson, who oversees the retail branches for Countrywide Home Loans,” say, ‘What’s going to happen this year?’ Do I have a child who, in a year, is going to college? Are we going to have a child, maybe add a bedroom or have to move?’” The answer might make you go mortgage shopping.
For example, let’s say you own a house and plan to move in a couple of years because your family is going to grow. Consider refinancing into an adjustable-rate mortgage with a low initial rate that lasts three years (a “3/1 hybrid ARM”). That initial rate probably is lower than the rate you’re paying now and the same with the monthly payments.
Hanson believes that you should ask yourself periodically: “Is my interest rate higher than the market today? Would it make sense to refinance, to take cash out? Would it be a good idea to get a reverse mortgage? How much is my house worth?”
2. Watch out for reset. Have you ever seen a cartoon where Bugs Bunny stands at the base of a cliff and he yells at someone standing on the cliff’s edge, “Watch that foist step. It’s a doozy!” Same thing with a lot of adjustable-rate mortgages: The first step is a doozy _ but up instead of down.
The rate adjustment is called the “reset,” and on hybrids such as 3/1 and 5/1 ARMs, the rate can jump as much as 5 percentage points. More realistically, a lot of borrowers face jumps of 3 percent to 3.5 percent in 2007. For interest-only borrowers, that might mean a doubling of the monthly payment.
Don’t get caught by surprise by a rate reset. Refinance if necessary.
3. Don’t pay the minimum on an option ARM. An option ARM is an adjustable-rate mortgage that lets you decide how much you pay each month. The minimum payment doesn’t necessarily even cover that month’s interest. “You don’t want to end up owing more than what you started out with,” says Jim Bradley, owner of American Residential Lending Corp., a mortgage brokerage in Atlanta.
4. When you get a mortgage, shop around. If you’re smart, you’ll start your mortgage search by looking at Bankrate.com’s mortgage rate tables. Don’t stop there, says Steve Habetz, owner of Threshold Mortgage in Westport, Conn. “First, shop the Internet for rates, but look for a local lender to apply for your loan,” he says. If you have questions or problems, either before or after getting the loan, “you can get in your car and meet someone to talk to.”
5. Make an extra payment. If you make 13 mortgage payments every year, you will pay off a 30-year, fixed-rate mortgage in less than 25 years. Many online mortgage calculator lets you find out how extra payments affect your payoff date, whether you make them monthly, annually or just once.
6. Think about getting mortgage insurance instead of a piggyback loan. If you buy a house in 2007, and you make a down payment of less than 20 percent, you’ll either have to buy mortgage insurance or get a piggyback loan _ a primary mortgage for 80 percent of the home’s value and a second mortgage for the rest that you owe.
For a long time, piggyback loans were almost always a better deal because the interest on both loans was tax-deductible and mortgage insurance wasn’t deductible. But that changed on the last night of the 109th Congress, when both houses passed a tax law. For loans originated in 2007, the mortgage insurance premiums will be deductible from federal income tax.
7. Be skeptical. “If it sounds too good to be true, it probably is,” Habetz says. He sees plenty of customers who got mortgages (usually option ARMs) at 1.25 percent from other lenders. Then the borrowers are surprised when the rates start rising abruptly just a year later. “Now they find out there is no such thing as one-and-a-quarter percent, they’re facing huge prepayment penalties to get out of these loans or they’re facing a rate that’s well above the market at this point,” Habetz says.