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If you are a homeowner or interesting in buying a
home, one of the biggest concerns you probably
have is to find the right mortgage.  Mortgage rates
will generally vary over time, moving up or down
for all participants in the market.

Within the market range, your mortgage rate will
depend on:

1) the mortgage product and amount.
2) your credit score / profile.  
3) your income.  
4) your current debt obligations (expenses).  
5) the amount of down payment (or equity in the
home if a refinance.)  
6) your net assets or net worth.

Of course the amount needed to borrow will
largely be determined by the property being
purchase/refinanced. For more overall information
on Real Estate, please see our
Real Estate
section.  

Here are some tips on how to ultimately lower your
mortgage costs.

1) Mortgage Interest Rate: Can I get a Low Interest
Rate Mortgage?

One of the biggest factors in determining the size
of your mortgage payment (besides the size of the
loan) is the mortgage interest rate.  Make sure you
shop around, finding the lowest mortgage rates
available. The first step is to identify several
mortgage lenders or brokers to work with.  After
educating yourself about your needs, determine if
they have the mortgage products that you require.
Next, ask to see that day's rate sheet. I recommend
investigating 4 or 5 in this manner and proceed
with those that comply and seem professional.
You can then narrow down to a final lender as the
process moves on based on competitive rates,
service and other factors.


Fixed Rate vs.  Adjustable Rate Mortgage

Normally a fixed rate mortgage is better for a
borrower, especially when interest rates are at
relatively low levels historically - which they are
now. The advantage is they have locked in a rate
that won't change even if interest rates go up
generally. They will not benefit if interest rate go
lower, however. They do have the option to
refinance if interest rates go down, but this also
involves incurring new closing costs.  

An adjustable rate mortgage makes sense when a
person knows that they will only be in a home for 3
to 5 years. They can get a mortgage with a lower
interest rate up front. They need not worry about
the rate adjustment, because they will be selling
their home. Generally, only sophisticated
borrowers should take an adjustable mortgage
when they intend to stay in their home for longer
than the adjustment period.   


2) Your Credit Score:

Before you apply for a mortgage, you should have
a good idea of your credit score and what it
means. The credit score is a measure of your
credit-worthiness, or ability to pay back your
debts. It is generally a number from 350 to 850.
Anything over 720 is considered good. 600-720 is
considered average. Below 600 is poor.

Your credit score is determined by an evaluation of
the amount of credit you have now and in the past,
the timeliness of your repayments, and the ratio of
credit outstanding to total credit available.  Your
score will be higher the longer you have had
credit, repaid on time and kept open credit lines.   

The better your credit score, the lower the interest
rate, terms, and fees you will qualify for. You'll
need a score of 680 or more to qualify for the best
interest rates and terms. Those with average or
lower credit scores will have to pay higher interest
rates with less favorable terms. Those with scores
in the low 500s and below, will be unlikely to get a
mortgage.

The three main credit reporting companies that
compile these reports are TransUnion, Equifax and
Experian.  Each of these companies regularly  
update information provided by banks, lenders,
etc., on how much debt you have outstanding,
new loans you have taken out and your repayment
history.  Using this information, these credit
reporting agencies calculate a credit score for you.
This helps banks and other potential creditors to
predict the risk they are taking when they lend to
you. See below for more information on managing
your credit score.

3) Your Income: one must have a high enough
income relative to the amount of the loan to qualify
for a mortgage.  You need to know what your
financial capacity is.  A general  rule of thumb is
that you should limit yourself to a mortgage that is
three times your income. Or less. This rule can
vary depending on interest rates. Higher interest
rates mean the preferred ratio should be even
lower than three.

Specifically, a lender will only make a loan where
the monthly payments are a certain percent of your
recurring monthly income. And
(4) where your total
monthly expenses are a certain percent of  your
monthly income. For example, to qualify for an
FHA loan, your monthly loan payment cannot be
more than 28% of your gross monthly income, and
your total recurring expenses cannot be more than
41%. Total expenses here means all of your  
monthly expenses, such as loans, insurance,
utilities, taxes, etc., including the new mortgage
loan. Other lenders may be somewhat less
restrictive, depending on other factors.    

5) How large a down payment?: The amount of
your down payment will depend on a few things.
First, you may want to put a certain amount down,
higher than required, to limit the debt that you
incur (and your risk). Second, your lender and/or
the loan program you enter may require a
minimum percent of loan to be put down. Or may
tie higher  interest rates to lower down payments
and vice versa.   

For instance, an FHA insured mortgage, one
guaranteed by that government agency, can be
obtained with a down payment as low as 3.5%.  
However, many private lenders will require you to
put down 10-20% to make the loan at all, or to
qualify for their better terms (interest rate, fees).
Generally speaking, the more you can put down
the better, as the smaller amount loaned to you
represents lower personal financial risk to you.

6) Your Net Assets (Net Worth): Many lenders will
take your net worth into account when qualifying
you for a mortgage loan.  Your net assets
represent a degree of security for them, as you
could tap into them to repay the loan even if you
can't pay through other means. This is especially
true if you don't meet other criteria (income) for the
loan.


Choose a Term that is Right for You:

Another issue to consider is the term of the
mortgage, or number of years you will be paying
off the loan. Generally 15 or 30 year terms are
available.

The advantage of the 15 year loan is you will pay it
off sooner, and  avoid paying a large amount of
interest in the process. The downside is will have
higher monthly payments, and will possibly  
qualify for a lower mortgage amount than you
would for a 30 year loan. The reverse is true for a
30 year loan - lower payments, more total interest
paid, but possible easier qualification.   

This is an individual decision, as each borrower
may have different current income needs, and a
different desire for the use of their money for
different investment or other purposes.  In general,
it is wise to choose the shorter term if one can do
that and meet all other current financial needs in at
the same time.    


Other ways to save Money on Your Mortgage

One strategy to lower your interest mortgage costs
is to sign up for bi-monthly payments instead of
monthly.  With a 30 year mortgage, you can cut
your interest cost slightly because your are
effectively paying off the loan sooner, having made
the equivalent of an additional payment every
year.    

Another strategy is to simply pay off your
mortgage more quickly than the 15/30 year loan
agreement. You  pay more than your monthly
payment requires, thereby reducing your total
principal loan balance to lower than it would have
been. You'll shorten the number of months you
need to pay in this manner. Your lender may
impose some limitations on this.

For instance, if you have a 30 year mortgage on a
$150,000 home, with a 5.76% fixed interest rate,
you would pay approximately $876 per month.  
However, if you raised the amount you pay each
month to $976, you would pay off your mortgage 6
years early and save yourself approximately $40K+
dollars in the process.


Exotic Mortgages: Over the past few years, other
mortgage types such as interest only or option
mortgages have become available. The headlines
scream of the dangers of these mortgages, as
many who borrowed under them were unaware of
the consequences of them. Even if available, I do
not recommend to anyone except the most
sophisticated borrowers and investors.

Refinancing:

Refinancing your mortgage is when you take out a
new mortgage loan on your home, replacing the
old loan.  This usually includes a change in
interest rate, term and in many cases a  withdrawal
of cash. Given the decline in the value of the
housing market, it has become more difficult or
impossible for many to refinance. Generally, you
will need to have at least 30% equity in appraised
value of your home to consider refinancing.

If you are refinancing to simply lower your
payments, the general rule of thumb is the new
interest rate should be 1 and 1/2% lower (or more)
than the old loan rate to make the transaction
worthwhile. Refinancing should be used
cautiously, as in many cases it may it will increase
your financial risk. During the real estate boom,
many people over-used it, placing them in a
tougher position now that real estate values have
dropped in many areas. However, for home
owners with a certain profile and needs,
refinancing can still be an attractive option now
that interest rates are very low.

Who Should Refinance

If you are thinking about refinancing your home,
some of the things that you should take into
consideration include the amount of money you
still owe on your current loan, the current
appraised value of your home, your credit rating,
the current interest rates and the terms of your
mortgage, whether it is fixed, an adjustable rate,
etc.  

If you have built up a lot of equity value in your
home (even with the current decline in prices),
your credit is in good shape and you are looking
for a loan to make a big purchase such as college
or an investment, then refinancing your home may
be a good idea.  

Who Should Not Refinance

Home owners that should not refinance are those
that are happy with their current mortgage terms
and rates and do not need the money for a
productive purpose, such as remodeling their
home. Also, those homeowners whose homes
dropped in value making their mortgage upside
down (meaning that you owe more money on
your mortgage than your home is worth), those
that have a poor credit rating, and those
homeowners in areas where prices are expected
to continue to drop.


Additional Credit Report Information:
Here is some information regarding credit reports
that can ultimately help you increase your credit
score.

Request Your Credit Report Each Year

You should request your credit report from at least
one of the big reporting agencies each year and
look it over thoroughly.  By checking your credit
report, you can evaluate your credit score, look for
errors in reporting and guard against identity theft.  
In the case of identity theft, if a loan was opened
that you are not aware of, you can contact the
lender, credit reporting agency and the police to
minimize the damage done to your credit score.

Reduce Your Debt

An easy way to increase your credit score is to
reduce debt.  While having a small amount of debt
can be helpful when establishing credit history, if
your credit score is good to excellent, you no
longer have to carry debt to show lenders you are
at low risk. On the other hand having high debt
relative to your maximum debt allowed will lower
your credit rating.  

If you owe a lot of money as compared to your
total income (not including a mortgage or student
loans), most lenders will be willing to lend you less
and / or at higher interest rates. Remember the
more debt you have, even if you pay it off in a
timely manner, ultimately means the more risk you
are to lenders.  By lowering your debt, you can
raise your overall credit score.

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Latest Articles:
Mortgages provide an essential tool in acquiring
real estate and potentially helping one achieve
financial security. Of course, during the financial
meltdown it became obvious that too many
unqualified buyers got mortgages, and there   
were gross excesses in the selling and
securitization of those mortgages. But they
remain a basic financial tool to acquire real
estate. Here is important information to help you
determine what your needs are and what type of
mortgage product you may need.