Seven Mortgage Tips for 2007

Before the New Year is upon us, Bankrate reminds readers of seven home loan tips for 2007:

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. But 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.

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.

2. Watch out for reset: Be aware of when mortgage rates on your ARM change.

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.

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.

It’s true. 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 searching through various home loan 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. A 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. There are plenty of customers who got mortgages (usually option ARMs) at 11/4 percent from other mortgage 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?