December 31, 2007

This New Year’s Eve, as you plan all of the things you’re going to do next year – join a gym, clean out the closet, give up chocolate – whatever, add one more to your list: if you’re going to be buying a new home or refinancing your existing mortgage, resolve to get a mortgage that you can afford.

Finding the right mortgage is a big deal.  The recent mortgage crisis – with foreclosure rates rising by 200% in some areas – has shed light on the fact that getting the wrong mortgage can cost homeowners tens of thousands of dollars and force them out of the homes they love.

Don’t let this happen to you.  Learning a few must-do tips for the mortgage process can help keep you out of trouble – and in the home you love.

Getting an affordable mortgage, part 1: Decide how much you can comfortably afford to pay each month

During the housing boom, a lot of homebuyers got themselves in trouble by taking out mortgages with monthly payments that were more than they could comfortably afford.  Some took out mortgages with low initial interest rates that are now resetting to much higher rates – dramatically increasing their monthly payments.

When thinking about your different mortgage options, make sure that you’ll feel comfortable with the monthly payment in any scenario (that means if you take out an adjustable-rate mortgage, you’ll be able to make the monthly payment even if the mortgage adjusts to the highest rate). 

Your mortgage lender will be able to help you determine how mortgage loan amounts translate into monthly payments.  You can also use Bankrate’s online mortgage payment calculator, available at www.bankrate.com.

Your dream home can quickly become a nightmare if you take out a mortgage loan that you really can’t afford.  So sit down and be honest with yourself – you’ll be glad you did.

Getting an affordable mortgage, part 2: Get the best mortgage given your unique situation

Many homeowners have run into trouble with adjustable rate mortgages.  Many are probably wishing that mortgage lenders had never offered them.  It’s true that fixed rate mortgages, where the interest rate stays the same over the whole life of the loan, are the least risky mortgage option.  But adjustable rate mortgages can still make sense in some cases, as long as you can still afford the mortgage when the interest rate adjusts.

To decide which mortgage will be best for you, follow these 5 steps:

1. Educate yourself on the differences between fixed rate mortgages and variable rate mortgages. 
2. Ask yourself: How long am I planning on owning this home?  If you plan on being there for the long haul, a fixed rate mortgage may be your best bet.
3. Understand how current interest rates compare to historical rates.  If interest rates are low compared to historical standards, now may be the time to lock in a fixed rate, unless you’re sure that you’ll be moving in the next few years.
4. Think about your risk tolerance.  Fixed rate loans are the least risky.
5. Analyze your budget as well as the difference between current fixed rate interest rates and variable rate interest rates.  If the difference is small, the added risk may not be worth the savings.

Getting an affordable mortgage, part 3: Get a mortgage pre-approval before you start house hunting

You’ll get a better mortgage – and a better deal on your house – if you get a pre-approval from a lender before you start house hunting.

A pre-approval is a binding statement from a lender of the amount of money you qualify for.  One benefit of getting pre-approved is that it will allow you to confidently negotiate better loan terms with different lenders, because you can say “I’ve been pre-approved with Bank Y, and they’re offering X, but I’d like to do business with you if you can give me a better deal.”

Another benefit is that you’ll be taken more seriously by sellers.  When sellers have a choice between offers, they’ll more likely accept an offer from a buyer with a pre-approval because it gives them confidence that you can get a mortgage loan to purchase the house.

Having a mortgage you really can afford will make your life much happier in 2008 and beyond.  So put getting an affordable mortgage at the top of this year’s New Year’s resolutions list.

And to learn more about the four mortgage must-dos you have to know to save yourself thousands, visit http://myphoenixmls.com/4-mortgage-must-dos.asp.