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Making Your Mortgage Invincible
There's much bad news in the mortgage industry these days - rising delinquencies, lenders in crisis, and more. Whose problems are these? After all, the problem seems to be concentrated in loans to the riskiest borrowers. If you have any kind of mortgage with changing payment terms, you should ask yourself: "Will a big jump in my monthly payment wreck my personal finances?"
The creative loans and more liberal borrowing rules that led to the recent industry troubles aren't limited to people with poor credit or lower incomes. Adjustable-rate mortgages with low payments for the first few years are the only thing that enabled some families to stretch and buy their new home. In 2004, 69% of purchases and 63% of refis of Jumbo loans (over $417000) were done at adjustable rates, according to First American Loan Performance, a mortgage-data company. Many of these borrowers may be experiencing higher payments. The mortgage business has been shaken in the past few weeks. New Century Financial Corp., Fremont, and other sub-prime lenders stopped making new loans altogether.
People don't pay enough attention to their home loan -- likely the biggest debt they'll ever take on. Now is a good time to change that habit, especially if you're in a mortgage with an interest that can change. The safest solution is to switch into a 30-year fixed rate. Interest rates are low by historical standards, and better than most rates available in the past 18 months.
Here are some questions to see if your mortgage is invincible.
Are you spending more than 28% of your pretax income on mortgage principal and interest payments, plus property taxes and homeowners insurance? Or do these four items, plus all your other debts, add up to more than 36% of your gross income?
These are old industry standards. Lenders have been lending with these figures are up into the 40s or 50s. You don't want to go up there for very long. Taxes and a 401(k) deposit can eat up 30 or 40 percent of your income, but you still need to eat.
Then there's the spouse test. Ask yourself what your significant other would think of the terms of the mortgage if he or she knew about it.
An increasing payment down the road can be okay if your household income is going to rise, or if you have enough reserves in the bank to ride through an interest rate increase. You can always refi again but you should realize a decent benefit if you do so.
If your own circumstances make you pause when faced with the questions above, it's worth at least shopping for a fixed-rate mortgage that could give you some stability. There are excellent calculators at www.firstratelending.com to help compare your current situation with other options. Your payment may go higher, but you may obtain a great piece of mind.
Before you research rates, you can go to myfico.com to buy your credit score, which is the figure that most mortgage lenders consult when considering your creditworthiness.
A FICO score of about 620 and below is the rough dividing line between prime (good credit) and sub-prime (more risky) borrowers. Anything above about 740 (out of 850) probably will give you a better rate.
If you're on the lower end, improving your score is especially important, because many lenders who service that market are tightening their standards or getting out of the business completely.
To get your score up, pay every bill on time and try to lower any outstanding credit-card debt. Don't open a bunch of new credit-card accounts -- but don't close any either, because the length of your credit history factors into the score.
Once your credit is in shape (it could take as many as 60 days to see results), go shopping. When you find a loan you like, don't sign anything until you understand everything. Incredibly, there are still plenty of smart people getting mixed up in mortgage loans with terms and rates that they don't fully understand.
A good licensed mortgage professional can help you through this process and explain everything to you. He also has all the options available for you in your given situation. Be careful of those not licensed as they may not understand the process themselves.
There's much bad news in the mortgage industry these days - rising delinquencies, lenders in crisis, and more. Whose problems are these? After all, the problem seems to be concentrated in loans to the riskiest borrowers. If you have any kind of mortgage with changing payment terms, you should ask yourself: "Will a big jump in my monthly payment wreck my personal finances?"
The creative loans and more liberal borrowing rules that led to the recent industry troubles aren't limited to people with poor credit or lower incomes. Adjustable-rate mortgages with low payments for the first few years are the only thing that enabled some families to stretch and buy their new home. In 2004, 69% of purchases and 63% of refis of Jumbo loans (over $417000) were done at adjustable rates, according to First American Loan Performance, a mortgage-data company. Many of these borrowers may be experiencing higher payments. The mortgage business has been shaken in the past few weeks. New Century Financial Corp., Fremont, and other sub-prime lenders stopped making new loans altogether.
People don't pay enough attention to their home loan -- likely the biggest debt they'll ever take on. Now is a good time to change that habit, especially if you're in a mortgage with an interest that can change. The safest solution is to switch into a 30-year fixed rate. Interest rates are low by historical standards, and better than most rates available in the past 18 months.
Here are some questions to see if your mortgage is invincible.
Are you spending more than 28% of your pretax income on mortgage principal and interest payments, plus property taxes and homeowners insurance? Or do these four items, plus all your other debts, add up to more than 36% of your gross income?
These are old industry standards. Lenders have been lending with these figures are up into the 40s or 50s. You don't want to go up there for very long. Taxes and a 401(k) deposit can eat up 30 or 40 percent of your income, but you still need to eat.
Then there's the spouse test. Ask yourself what your significant other would think of the terms of the mortgage if he or she knew about it.
An increasing payment down the road can be okay if your household income is going to rise, or if you have enough reserves in the bank to ride through an interest rate increase. You can always refi again but you should realize a decent benefit if you do so.
If your own circumstances make you pause when faced with the questions above, it's worth at least shopping for a fixed-rate mortgage that could give you some stability. There are excellent calculators at www.firstratelending.com to help compare your current situation with other options. Your payment may go higher, but you may obtain a great piece of mind.
Before you research rates, you can go to myfico.com to buy your credit score, which is the figure that most mortgage lenders consult when considering your creditworthiness.
A FICO score of about 620 and below is the rough dividing line between prime (good credit) and sub-prime (more risky) borrowers. Anything above about 740 (out of 850) probably will give you a better rate.
If you're on the lower end, improving your score is especially important, because many lenders who service that market are tightening their standards or getting out of the business completely.
To get your score up, pay every bill on time and try to lower any outstanding credit-card debt. Don't open a bunch of new credit-card accounts -- but don't close any either, because the length of your credit history factors into the score.
Once your credit is in shape (it could take as many as 60 days to see results), go shopping. When you find a loan you like, don't sign anything until you understand everything. Incredibly, there are still plenty of smart people getting mixed up in mortgage loans with terms and rates that they don't fully understand.
A good licensed mortgage professional can help you through this process and explain everything to you. He also has all the options available for you in your given situation. Be careful of those not licensed as they may not understand the process themselves.