How to Get a Mortgage or Refinance Your Home

The news is full of reports on the subprime mortgage mess. Foreclosures are rising dramatically, and mortgage delinquencies are at an all time high. What's more, the majority of adjustable loans out there are due to reset to higher interest rates—which means higher monthly payments—in the first half of 2008. All of this suggests homeowners and potential home buyers are in for a rocky ride.

But there is good news. Although lenders have tightened their standards, long-term mortgage rates for fixed-rate loans actually declined in the final months of 2007 and have settled at about 5.8 percent for a 30-year fixed rate.

So if you're thinking of buying a home or refinancing your mortgage in the coming year, it has never been more important for you to get your other house—your financial one—in order. That's the only way you can make sure the loan process goes smoothly. Ask yourself and members of your Money Group the following 10 questions to find out if you're ready for the mortgage plunge—whether you're a first-time homebuyer, trading up or trying to refinance. Then turn to the three tasks that will help you get the best loan that's right for you.

Finally, remember this important advice from Keith Gumbinger, vice president of the mortgage research firm HSH Associates. Beware the risks you're accepting when you sign any financial document, but especially a mortgage agreement. The one lesson we've learned from the current mess is that millions of people jump into mortgage products for which they are unprepared. Don't buy a house based on what the monthly payment is when you first get the loan, but rather buy a house based on what the monthly payment could be 10, 20 or 30 years down the road. Then determine if you can afford it.

1. Have you applied for a mortgage before? (Jean's take: First-time homebuyers can get so overwhelmed by the daunting number of jargon-y documents that they sign without knowing exactly what's at stake. Take your time and make sure you understand everything. Don't let anyone rush you.)

2. Have you checked your credit reports to see if you have any history of late payments or other credit problems? Are there disputes you can clear up?

3. Do you have a good handle on your budget so you realistically know how much you can afford?

4. Have you taken into account all the other costs associated with a mortgage besides the monthly payments? (Jean's take: There's so much more than just the amount of the mortgage. You have to consider closing costs, legal fees, real estate taxes, private mortgage insurance and more.)

5. Do you need a mortgage broker? (Jean's take: If you've had a history of credit problems, this can be the best way to get a mortgage. Brokers have access to wholesale markets that are less expensive.)

6. If you own your home now, what type of loan do you have?

7. If you have an adjustable-rate mortgage, do you know when your interest rate is due to reset? How much will your payments jump? Can you afford the new payment?

8. If you have an adjustable-rate mortgage, have you looked into refinancing to a fixed-rate loan? With this type of loan, you'll know how much your monthly payment will be over the life of the loan.

9. Are you having so much trouble making your payments you don't think you could qualify for a new loan?

10. How can you get help if you have a troubled loan? (Jean's take: You may be one of the tens of thousands of Americans holding a mortgage you can no longer afford to pay. If so, you need to renegotiate with your lender to stay out of foreclosure. You may even get some relief from Washington. In December 2007, the administration finalized a plan that would freeze interest rates for thousands of homeowners whose loans were due to reset. If you need help, call the Home Ownership Preservation Foundation's hotline at 888-995-4673. A counselor will refer you to a local advocacy group that can help you renegotiate your loan.)

1. Know how much you can afford.
Before you look at a house, it's best to come up with a number that you know you can afford. One of the reasons so many people got sucked into the subprime mess is because they were stretching to buy more house than their budget would allow. Low interest adjustables and interest-only loans made the monthly payments seem affordable—until now, of course. Use the worksheet to see what your mortgage budget really is. This will also help you budget for other important household costs such as maintenance, taxes, insurance, etc.

2. Get your financial house in order.
Have you saved enough for a solid down payment? In recent years lenders have allowed for very little or sometimes even no down payment, meaning homeowners financed as much as 100 percent of the purchase price. That strategy has certainly backfired. There's nothing like a solid down payment to help you build equity in your home immediately, to impress a potential lender and to help you avoid expensive private mortgage insurance. If you don't have the cash now, come up with a savings plan that will help you reach your goal soon.

In addition to saving for a down payment, you need to take a close look at your credit history. Any problems on your credit report and you won't qualify for a good rate—especially these days when lenders are tightening their standards. Learn more about how to raise your credit score.

3. Look for a good lender or mortgage broker.
This will take some expert shopping. Interest rates can vary significantly within a single local market. You'll need to check various credit union, Internet lenders and banks—large and small—before you buy. Start your search at HSH.com, where you can get a list of current lenders and the rates they're offering on various mortgages throughout the country.

If your credit history is less than blemish-free, you may find you need to go through a mortgage broker. A good broker has access to more loans and more types of lenders than you can find on your own. To find a good mortgage broker, ask around and do your research. A good place to start is HSH Associates website, HSH.com.

• Fear and the housing market
• How buying a home can increase your wealth
• Budget smarts for buying a home
• Shave five years off your mortgage payment
• Don't let a new home strain your finances
• The truth about closing costs
• Is real estate a risky investment?
• The pros and cons of buying property
• Home finance basics everyone should know
• House hunting how-tos
• How can I sell my house in a bad market?

Ready to buy a home? Test your mortgage smarts.  

1.	Calculate your net monthly income. That's your income after taxes, Social Security contributions, retirement contributions, etc.
	Example Figure A Let's say your current net monthly income is: $4,500.00		Your Figure A Enter your current net monthly income (without commas): $ .00
2.	Next, total up monthly payments on your debt—all your debt: car loans, credit card balances and/or student loans. (Exclude your rent or mortgage payment.)
	Example Figure B Let's say your monthly debt payments are: $1,000.00		Your Figure B Enter your total monthly payments (without commas): $ .00
	Your Figure B is % of Your Figure A. If Figure B is more than 25 percent of Figure A, you must reduce your debt before you can afford to pay a mortgage.
3.	Add up all your monthly living expenses. Go back over a year's worth of expenses and tally every check and card charge purchase, including those for your monthly transportation costs, drying cleaning, food and entertainment, vacations, birthday gifts, holiday expenses and other miscellaneous costs (excluding mortgage payments). Next, total all these expenses and divide by 12.
	Example Figure C Let's say that your current monthly expenses on average come to: $1,500.00		Your Figure C Enter your current monthly expenses (without commas): $ .00
4.	Add Figures B and C together to get Figure D.
	Example Figure D In this example, that would be $1,000 + $1,500 = $2,500.00		Your Figure D Your Figure B + Your Figure C = $ .00
5.	Now, subtract Figure D from Figure A.
	Example Figure E In our example, this would be $4,500 - $2,500 = $2,000.00		Your Figure E Your Figure A - Your Figure D = $ .00
	Figure E is the maximum monthly amount you can afford to spend on all home ownership costs.
6.	Reduce Figure E by 30 percent to get Figure F.
	Example Figure F In our example, this is $2,000 - ($2,000 * .3) = $1,400.00		Your Figure F Your Figure E - (Your Figure E * .3) = $ .00
	Figure F is the highest monthly payment you can afford to make for a mortgage alone. Remember, you will still need that 30 percent (and sometimes even 40 percent) to pay for property taxes, home insurance, etc. What size mortgage you can afford will also depend on available interest rates, the length of the mortgage and whether you get a variable- or fixed-rate mortgage. A difference in interest rates of even half a percentage point can mean a lot. The monthly payment for a 30-year fixed mortgage of $300,000 at 6 percent is $1,799. But at 6.5 percent, the monthly payment on the same mortgage is $1,896—a difference of almost $100.