• It is generally wise to opt for a 30-year home mortgage in order to have maximum payment flexibility.  If you believe the nation will continue to experience moderate inflation and your annual income will rise as a result of it, then the 30-year loan will allow you to pay a fixed debt with inflated dollars.
  
  
• Consider reducing both the amount of interest you pay over the life of a home mortgage and the time it takes to pay off the mortgage by employing the following payment strategies:
  
  
  • Consider obtaining a 30 year mortgage and then implementing a double-pay plan by making your regular payment plus the scheduled principal payment for the next month at the same time.  Using this strategy will allow you to pay off a 30 year mortgage in 15 years and almost cut in half the total interest over the life of the loan.  The monthly payments will gradually increase over time because more principal is scheduled to be paid as the loan ages.   The payments will start out lower than the payments on a 15 year loan, however, generally after about five years the payments will be larger.
    
    
  • Consider reducing the amount of interest you pay over the life of your mortgage by making additional principal payments whenever possible.
    
    
  • Sharon obtains a $100,000, 10 percent, 30 year loan.  The required monthly payment is $877.57.  Sharon decides to add $100 to each monthly payment.  As a result, Sharon is able to pay off the mortgage in approximately 19 years and 3 months.  She also saves over $90,000 in interest payments.
    
    
  • Consider reducing the term of your mortgage and the lifetime interest paid by arranging to pay one-half of your mortgage every two week.  Because you will be paying your mortgage every 14 days, an additional payment will be collected each year.  The result is that the loan is paid off faster.
    
    
  • Alex obtains a $100,000, 10 percent, 30 year mortgage.  The monthly payment is $877.57.  Alex arranges to pay one-half of the mortgage payment or $438.79 every 14 days.  As a result, he pays the mortgage off in approximately 21 years and saves approximately $77,000 in interest payments.
    
    
  • Consider a 15 year mortgage if the interest rate is lower than a comparable 30 year mortgage.  With a straight 15 year mortgage you will pay less interest over the life of the loan than with other prepayment strategies that cut the loan term to 15 years.  However, with a 15 year mortgage your monthly payments are higher and you lose the payment flexibility you have with a 30 year mortgage.
    

When choosing between a higher interest rate loan with no points and a lower interest rate loan with one or more points, equate one point with an additional 1/4 percent of interest and determine which loan has the lower rate.  For example, a 7% loan with two points would be equivalent to a 7½ percent loan with no points.  The lender is required to tell you the annual percentage rate (APR) which factors in the points over the life of the loan.  Because most home owners sell their homes before the loan is fully paid, the APR is usually higher than the rate the lender shows you.

Consider refinancing your existing mortgage if current fixed interest rates are two percentage points less than your existing rate.

The aim of refinancing is to reduce your monthly payment and save on interest paid.  The difference between your old house payment and your new house payment should enable you to recover the closing costs within three years. If it will take longer to recover, think twice about refinancing unless you are certain you will remain in the house beyond this period.  Closing costs consist of points, appraisals, title policies, and credit reports.  To determine the number of months it will take you to recoup the costs of refinancing, divide the costs by the monthly amount you would save by refinancing.

Consider the following types of loans for the purchase of real estate:

• Fixed Rate Mortgage
  This type of mortgage has a fixed monthly payment and a fixed interest rate. It is generally payable over 15 to 30 years, although payments can be accelerated.
  
  
• Adjustable Rate Mortgage
  With this type of mortgage the interest rate can change annually based on changes in an interest index. As a result, your payments can fluctuate annually.  The first year's payment is almost always lower than a fixed rate mortgage which may enable you to qualify for a larger loan.  Interest rates should have a cap of no more than two points annually and five points over the lifetime.  Annually verify that the new adjusted payment has been recalculated correctly or hire a service to do it for you.  Recent surveys have shown that about 30% of Adjustable Rate Mortgages are recalculated incorrectly.  For a professional service that recalculates the rate for you, consider calling Consumer Loan Advisors (262-367-4400) or Mortgage Monitor, Inc. (800-AUDIT-USA).
  

• Graduated Payment Mortgage
  With this type of mortgage the initial payments start out low, then gradually increase over a period of five to ten years at which point they remain fixed.  This type of loan may be suitable if you expect your income to rise annually.

• Balloon Mortgage
  With this type of mortgage the monthly payments are usually computed as if the loan were being paid over a 10 to 30 year period.  However, the balance of a Balloon Mortgage is required to be paid off in a lump-sum at the end of a shorter period, usually 5 to 15 years.  Payments may be for interest only
  
  
• Shared Equity Mortgage
  With this type of mortgage the monthly payments and interest rates are lower in exchange for a portion of the equity resulting from appreciation at the time of a future sale or at the end of a period of years. This arrangement enables you to purchase a home that you would not have otherwise been able to qualify for.  Under a shared equity arrangement you share with an investor your right to a portion of the future appreciation in the value of the house.  The investor may provide a portion or all of the down payment, and you make the monthly payments.  At the end of a term of years the house is sold or refinanced.  Generally the appreciation in value is split 50/50.  Several variations to the arrangement can be structured to allow you to afford to purchase a house that otherwise would have been impossible for you to buy.          

• Fixed Rate Mortgage
  This type of mortgage has a fixed monthly payment and a fixed interest rate. It is generally payable over 15 to 30 years, although payments can be accelerated.

• Fixed Rate Mortgage
  This type of mortgage has a fixed monthly payment and a fixed interest rate. It is generally payable over 15 to 30 years, although payments can be accelerated.

• Fixed Rate Mortgage
  This type of mortgage has a fixed monthly payment and a fixed interest rate. It is generally payable over 15 to 30 years, although payments can be accelerated.     

• Real Estate Contract / Deed of Trust
  The contract or deed of trust is carried by the seller of the real estate.  The interest rate may be below the prevailing rates and a balloon payment may be due.
  
  If you fail to make your payments, foreclosure proceedings are much swifter than with a conventional mortgage.
  
  
• Assumable Mortgage
  With this type of mortgage the payments can be assumed from the previous owner.  Interest rates are generally lower than prevailing rates.  You may not have to qualify for the loan.
  
  
• Buy Down Mortgage    
  With this type of mortgage the builder or developer makes a payment to the lender in order to obtain a loan for a prospective buyer. The loan initially has lower payments. However, at the end of three to five years the payments increase.  Qualifying is generally easier due to the lower initial payments.  Typically, builders pass the cost of the buy down to you via a higher purchase price for the real estate.
         
• Wrap-Around Mortgage
  With this type of mortgage the seller retains his original low interest rate mortgage and you make payments on a new mortgage payable to the seller.  The new mortgage is generally at a higher interest rate.  The seller uses a portion of your monthly payment on the new loan to pay the lender on the old loan.  The difference is pocketed by the seller as profit.
   
• Growing Equity Mortgage
  The Growing Equity Mortgage carries a favorable below-market fixed rate but has variable payments.  The loan is generally a 30-year loan that is paid off in half the time because payments increase with inflation.  Payments generally increase at 50 to 75 percent of the annual inflation rate as measured by some cost of living index such as the U.S. Department of Commerce Index.  The increase in the payment is used entirely to reduce the principal balance.
  
  
• PALM Mortgage
  A Price Level Adjusted Mortgage or PALM is a mortgage with a principal balance that fluctuates with changes in the inflation rate.  In general the PALM payments are designed to be constant in purchasing power and, as such, the payment reflects the original amount borrowed, a stated interest rate, and inflation over the term of the loan.  The initial loan terms are usually very advantageous to the borrower but over time the payments increase to reflect increases in inflation.  Reg 1.1275-6T, Reg 1.163-11T(d)
  
  
• Employer Provided Mortgage
  Request an interest-free or low interest rate mortgage loan from your employer where the loan is secured by a mortgage on your new main home.  The new home must be purchased in connection with your move to your new place of work.  Reg 1.7872-5(C)
  
  
• Employer-Provided Bridge Loan
  Request an interest-free or a low interest rate bridge loan from your employer.  A bridge loan is temporary loan to allow you to purchase a new home while you are waiting to sell your old home.  The loan must be secured by a mortgage on your new main home that you purchase in connection with a move to your new place of work.  Reg 1.7872-5(C)       

• Rent with the Option to Buy
  Under this arrangement you sign a lease allowing you to rent the home and you agree to pay a premium for an option to purchase the house within a specified period of time at a prearranged fixed price.  Under some arrangements a portion of the rent you pay can be applied to the purchase price.  Renting with an option to buy allows you to lock in the purchase price and to buy time to accumulate sufficient cash for the down payment.  If interest rates are high at the time you enter into the arrangement, the option period will also allow you to wait and see if rates will drop to a more favorable level before you decide to purchase.

To qualify for a home mortgage, your mortgage payments, which consist of principal, interest, homeowners insurance and property taxes (PITI), generally are not allowed to exceed 28% of your total income.  In addition, your total monthly debt payments (home, car, credit cards etc.) generally are not allowed to exceed 36% of your total income.  Veterans Administration and Federal Housing Administration loans have more liberal ratios.  If your PITI and/or total debt payment ratios exceed the 28% and 36% limits, consider the following ideas:

Increase your total income by including overtime, bonuses, part-time business income, and all investment income.

Pay off your credit cards and other consumer debt before you submit your loan application.

Reduce the mortgage payment by obtaining a lower interest rate.  You can obtain a lower rate by paying one or more points in exchange for the lower interest rate.  You can pay the points yourself or you can ask the seller of the house (unless you are refinancing the loan) to pay the points.  Another way to get a lower initial interest rate is to apply for an adjustable rate mortgage.

If the above strategies are not helpful, ask the lender to allow you to exceed the PITI and/or the total debt payment ratio by a few percentage points because of your good credit history, your employment stability and history of consistent wage increases.

If you are a first time home buyer, consider one of several federal and state programs that only require you to come up with a down payment of 5% of the price of the home.  For example, the Fannie Mae Community Home Buyer Program requires only a 5% down payment, and 40% of that can be a gift from a family member.  To qualify, your income cannot exceed 115% of the average income earned by residents of your community.  State sponsored programs are often more liberal and have lower interest rates.

When shopping for a home mortgage, always compare the annual percentage rate (APR).  Call at least five lenders and select the one with the lowest APR and the best terms.

When shopping for consumer loans at financial institutions, always shop for the lowest annual percentage rate (APR) and not the lowest monthly payment.

To avoid the payment of mortgage insurance consider financing no more than 80% of the purchase price or appraised value of your home.

Deciding Whether To Pay Cash or Finance a Home

Frequently, retired homeowners and others with adequate resources are faced with the enviable opportunity to pay cash for a new home.  The decision to finance the purchase is frequently based on an erroneous assumption that the payment of interest will produce an overall economic benefit.  Consider the following ideas before you make your decision:

• Are the investments from which you would make the cash purchase earning income at a rate lower than the proposed mortgage rate?  If your answer is yes and you are not willing to move your investments to higher yielding alternatives (and probably higher risk), consider paying cash.
  
  
• John and Barbara have $100,000 in certificates of deposit earning 6%.  The interest rate on a $100,000 mortgage used to acquire a new home is 8%.They will save $2,000 a year if they pay cash for the house instead of finance it.

If you are willing to move your investments to higher paying alternatives such as stocks and stock mutual funds but not all at once, consider paying cash for the house and purchase a potentially higher yielding investment over a period of months or years using Dollar-Cost-Averaging.

Dollar-Cost-Averaging enables you to take advantage of the ups and downs in values of equity investments.

Consider paying cash if your estimated interest deduction, along with other Form 1040 Schedule A deductions, do not exceed the Standard Deduction.

If you think you might need a large sum of cash for any reason, consider financing the house and obtain a Home Equity Line of Credit at the time of purchase.  Interest is not charged until you borrow against the credit line when an emergency or other critical need arises.  You can pay off the loan as quickly as you wish and borrow again when you desire.

If you pay tax on your Social Security benefits because your income is over $25,000 if you are single, or $32,000 if you are married, consider paying cash for your home in order to reduce your investment income.