Selecting The Right Mortgage - Information and Advice

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Let Your Lifestyle Be Your Mortgage Guide
by DeadlineNews.com

Where it was once a simple task to compare fixed rates from among perhaps a dozen or fewer savings and loan companies, the mortgage hunt today is like finding your way through a maze.

Your lifestyle, however, can help point you to the loan that's best for you.

Because lifestyle-based mortgage hunting focuses on your specific needs at a given time in your life, you'll likely land the loan that you can best afford and makes most financial sense.

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In this article, we focus on mortgages for:

• First-Timers
• Move-uppers
• Empty-Nesters
• Active Adults

First-Timers
Because the vast number of new and innovative mortgage programs target first-time home buyers, your search is perhaps the most difficult, but so-called "two-step" or hybrid mortgages can be a perfect fit.

The adjustable rate mortgages (ARMs) come with mortgage rates that are effectively fixed for the first step of three, five, seven or ten years and then become 1-year ARMs with rates that adjust each year for the term of the loan.

Hybrid ARMs are a good fit because statistics reveal first-timers typically move after five to seven years when growing incomes permit the move and growing families dictate the need for a larger home.

During the first step of the loan, the locked-in loan rate provides some financial stability for the young buyer and the rate is cheaper than that of a typical 30-year fixed rate mortgage.

On Aug. 9, for instance, BankRate.com said the national average annual percentage rate (APR) on a 30-year, conforming, fixed-rate mortgage (FRM), was 6.86 percent, but only 6.64 on a 3/1 ARM, 6.61 percent on a 5/1 ARM and 6.83 on a 7/1 ARM.

"It's a perfectly good strategy," says Peter Miller, a Silver Spring, MD-based online real estate publisher and author of the Common-Sense Mortgage (Contemporary Books, $16.95).

"The advantage of the lower rate is not only that you'll have lower monthly payments, but because of the lower monthly payments it's easier to qualify for," Miller added.

Miller says another common option for first-timers, are Federal Housing Administration (FHA) and Veterans Administration (VA) loans, especially for buyers who don't have large down payments.

The loans require down payments as low as 3 percent and have less stringent qualifying requirements than some non-government loans. However, interest rates tend to be higher and mortgage insurance premiums are tacked onto low down payment loans.

Move-Uppers
Some move-up buyers who know they will move-up again, likewise should consider hybrid loans for the same reasons they work for first-timers.

In the current low interest rate market, however, move-up buyers may do well to opt for a plain vanilla, conventional or jumbo 30-year fixed rate mortgage with 20 percent down. With rising home values in recent years, obtaining 20 percent down from the equity you've gained is not an unlikely scenario and rolling over that equity is a good plan.

"In terms of long-term financing, look for loans with at least 20 percent down to avoid private mortgage insurance (PMI). A plain 30-year mortgage with the right to prepay in whole or in part at any time and without penalty can be especially attractive because, if incomes rise, you can increase your monthly payments to shorten the loan term or reduce interest costs," said Miller.

During high interest rate markets, move-up buyers might consider 1/1 or 3/1 ARMs to make qualifying easier for the larger home they typically seek. Later, refinancing to a cheaper fixed rate could be possible.

Wayne, PA-based mortgage expert known as "The Mortgage Professor" Jack Guttentag says the ARM is also a good choice if you expect the ARM rate will remain below the FRM rate beyond the initial rate period and if you are prepared to risk that it won't.

Others, who are making the one and only move up, may want a cheaper loan with a shorter term.

Bankrate.com on Aug. 9 put the national average for 15 year fixed rate loans at 6.54 percent.

"You may not want to make mortgage payments for the next 30 years because you may not be working for 30 more years," say Randy Johnson, owner-broker of Newport Beach, CA-based Independence Mortgage Co. and author of Save Thousands of Dollars On Your Home Mortgage, (John P. Wiley & Sons, Inc., $14.95).

Empty-Nesters and Active Adults
If your children have left home, or you are getting ready to retire, you may not need your spacious home any more.

Moving down to a smaller home often raises the question, "Do your really need a mortgage?"

"Crunch the numbers out to see if you are better off getting a mortgage or going free and clear. Ironically, empty nesters are often in their highest earning years and this may be your last chance to use the mortgage interest and property tax deductions to shelter your income," says San Francisco broker Ray Brown, who also co-authored Mortgages for Dummies (Hungry Minds, $16.99).

If you do need a mortgage, says Brown, a mortgage with a shorter term, say 15 years, is a good choice. Rates are lower than 30-year loans and you have the option of making larger payments or paying the mortgage off early.

"Meanwhile, you get the preferred rate and you get the interest write off," says Brown.

On the other hand, the liberal capital gains tax law that allows couples to take tax-free profits of up to $500,000 on the sale of a home, could infuse you with enough cash to free you from the need for a mortgage-based tax shelter.

"It's always cheaper to pay taxes, than it is to pay interest. Let's face it, the American dream is not just a small house with a yard and white picket fence. It's a home without a mortgage," said Miller.

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DeadlineNews.Com is a San Jose-based electronic news service.
 

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