Tips for Choosing a Mortgage

Whether buying a home or refinancing an existing mortgage, it is important that home buyers and homeowners determine which type of home loan best fits their household's financial situation.  To help simplify the decision-making, Countrywide is sharing 10 tips for choosing a mortgage loan.  These helpful insights are just a few of the many valuable ways consumers may arm themselves with the knowledge needed to help achieve and maintain home ownership.

When it comes to choosing a home loan there are some basic principles everyone should consider. Two of the basics are, first, stay within your financial means, and second, never commit to anything without being 100% sure that it is in your best interests, ," says John P. McMurray, chief risk officer for Countrywide Financial Corporation, a diversified financial services provider and member of the S&P 500. "There are a number of points to consider when making a decision about taking out a mortgage loan."

Here are 10 tips to consider when deciding which type of mortgage loan best fits your household's personal and financial situation.  (more…)

Existing Home Sales Down Slightly

According to the National Association of Realtors, the pace of existing home sales in the United States was off slightly in May to a 5.99 million-unit annual rate.

The inventory of homes for sale rose 5.0 percent to 4.43 million units at the end of May which represents 8.9 months' supply at the current sales pace.  That is the highest months' supply since June 1992, although the 1992 figure only includes single-family homes while the current data also includes condos.

May saw the 10th straight month in which prices dropped from year-ago levels, with the national median price down 2.1 percent to $223,700.

Homes sales were mixed across the regions with the Northeast seeing a 5.8 percent increase for the month while the Midwest saw a 0.7 percent rise. The West and South reported a drop-off in sales with 0.8 and 3.4 percent declines respectively.

Credit Cards Before the Mortgage?

In another symptom of the subprime mortgage meltdown, stressed-out borrowers may be taking care of their credit card bills before making their mortgage payments.

According to a report from consumer credit reporting agency Experian, borrowers with credit scores of 620 or below are 30 days late more often with mortgage payments than with payments on bank-card debt.

The survey noted that historically, consumers have prioritized mortgage debt over credit card debt as they "traditionally view their home as their most valuable asset which should be protected at all costs."

But the current housing slump, in a very fundamental way, has changed the math that governs the way subprime borrowers deal with debt. 

Consumers who have dealt with phone calls, letters and wage garnishees from credit card collectors in the past may want to avoid repeating the experience.  Since home loans usually have a much lower interest rate than credit cards, most credit counselors will tell borrowers who are in over their heads to pay down their credit card debt first above all else.

Builders Getting Creative with Incentives

The "incentives" long familiar to new-car buyers — bonuses or rebates thrown in to sweeten a sale — are becoming more common in the new-home market as sales slow and credit continues to dry up.

Some of the best incentives are free upgrades, when the builder offers to include appliances, landscaping, a swimming pool, or features like hardwood floors instead of basic carpeting. These upgrades, which can save you thousands of dollars, often represent genuine value — a true discount, rather than a gimmick being paid for via an inflated home price. But watch out for "the catch." Sometimes these upgrades are only available if you accept (expensive) features you might not want or need, or if you finance through the homebuilder.

Just like car manufacturers, homebuilders have discovered that offering financing to their buyers can smooth the sales process while adding a significant revenue stream to their businesses. And just as with car-buying, sometimes the "factory financing" is a good deal and sometimes it isn't, especially if it's combined with other incentives. A $10,000 "cash back" promotion that requires you to use a builder's lender and pay above-market rates or fees may be no bargain. But as the market continues to soften, more genuine bargains are surfacing as builders with too much inventory turn to "blow-out financing," offering mortgages with below-market rates and reduced costs to buyers who suddenly have a lot more choices.

There are great deals out there, but not all deals are as good as they look.  If you're offered a complex package of incentives that includes a supposedly favorable mortgage, read everything carefully and look for the catch.  If you don't understand what you're reading, paying a real estate attorney to spend an hour or two reviewing the offer could be money well spent.

Lastly, never let a homebuilder tell you that you "have" to use their lender.  That's illegal: Federal law guarantees your right to seek financing and related services from independent providers, and a builder who tries to restrict your options is probably pulling a fast one.

Interest Only Loans - Can You Afford Them?

Interest-only and deferred-interest mortgages are gaining increasing popularity, as homeowners like the idea of having the freedom to decide how much to pay against their mortgage each month. Interest-only loans offer you the option to pay only the monthly interest, or you can pay the monthly interest and as much of the principal as you'd like. Deferred-interest mortgages give you even more choices. In addition to the payment options of an interest-only mortgage, a deferred-interest loan also allows you to pay just a portion of the interest payment each month (the unpaid interest would then be added to your principal loan balance).

To help you decide how much home you can afford, it's smart to think in terms of an interest plus principal payment each month. If you can only afford the minimum payment on your mortgage, you may be overextending yourself. Having a choice to pay only the minimum is quite different than only being able to afford the minimum.

Is an interest-only or deferred-payment mortgage right for you? If any of the following situations apply to you, these loans may be just what you've been waiting for:

• If you need cash flow and have a low interest rate, paying interest only is the same as borrowing money at a great rate.
• If you're paid on commission or depend on tips, and your income fluctuates month-to-month, interest-only or deferred-interest payments are great. When commissions are down, make the minimum payment. When you have an excellent month, pay the full payment or more.
• If you invest the money you don't put toward your mortgage in something with a higher rate of return. For example, if you pay 6.5 percent on your mortgage but find an opportunity to make an investment that returns 9 percent, you will make 2.5 percent on your money that you wouldn't make if you had paid your full principal plus interest.
• You have higher interest debt to pay off. Again, if you have credit card debt at 15 percent, it makes dollars and sense to pay that before mortgage interest debt at 6.5 percent.
• If you expect to be in your home for less than 10 years.
• If you live in an area with appreciating home values. Regardless of what you've heard, most of the country is still appreciating in value. In those areas, even if you pay mostly just interest on your home, you're likely gaining equity in your home. In some cases, you can gain equity even with deferred-interest minimum payments.

Make sure your mortgage professional goes over all the numbers and fully explains the payment scenarios. Don't assume anything.  Get real numbers and you'll make the best decision.