Seven Mortgage Tips for 2007

Best mortgage companies
By Holden Lewis
Bankrate.com

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?
2. Watch out for reset.
3. Don't pay the minimum on an option ARM.
4. When you get a mortgage, shop around.
5. Make an extra payment.
6. Think about getting mortgage insurance instead of a piggyback loan.
7. Be skeptical.

1. Review your mortgage -- does it still fit your circumstances? Homeowners with mortgages should assess their home loans annually, bankers say. Naturally, you would expect lenders to say that. It's a good idea anyway. 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 plan to move in a couple of years because your family is going to grow. Consider getting 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.

Before refinancing to save money, make sure you won't get zapped with a prepayment penalty, either when you refinance or sell the house. Calculate the cumulative monthly savings to see if they decisively outweigh the closing costs. If not, keep the current loan.

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?"

And one other question: "How much is my house worth?" Ask a real estate agent who is active in your neighborhood. It's a good way to introduce yourself to the person who might someday help you sell the house. For a quicker, but less-accurate estimate, consult Zillow.com.

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.

This is why Hanson suggests reviewing your mortgage annually. Don't get caught by surprise by a rate reset. Refinance the loan if it makes sense to do that.

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. You can make a payment that's big enough to pay off the mortgage in 15 years or in 30 years, or you can pay only the interest, or you can make a minimum payment that doesn't necessarily even cover that month's interest. That's right. In many cases, when you make the minimum payment on an option ARM, you owe more on your house the next month. "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."

And for Pete's sake, don't just talk to the lender with a desk inside the office of your real estate agent or builder. Sure, talk to that lender just to mollify everyone, but you won't get the best possible deal if you don't shop around.

It's illegal for a builder to require you to use the builder's in-house lender. If the builder tries to pull this trick on you, document everything and report it to the state attorney general.

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. Bankrate's 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.

This is an important change because it means that mortgage insurance will be cheaper in the long run for a lot of home buyers, especially those who live in their homes for five or more years and keep the same mortgage.

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 11/4 percent from other lenders and who were surprised when the rates started 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.

But you wouldn't make the mistake of getting a loan for hundreds of thousands of dollars without fully understanding it and reading all the paperwork, right?