Sunday, July 18, 2010

MORTGAGE & FINANCE: It’s a great time to get a mortgage, but the rules of the game have changed

For those who qualify, it’s one of the best times to get a mortgage. Last week, rates for 30-year fixed-rate loans fell to 4.57 percent, the lowest average since 1971. And if you missed out on the US home-buying tax credit, the rates may more than make up for that lost $8,000.

“A tax credit is immediate gratification,’’ said Leonard Baron, professor of finance at San Diego State University. “But long-term, with rates this low, you can get much more value.’’

But the game has changed. Your credit score must be at least 620, or you’ll have a hard time finding a loan. And how much you put down is a big variable. Some scenarios:

■You pay 20 percent down and expect to retire in the house.

Take out a 30-year fixed-rate loan. The interest rate stays the same — at historic lows.

■ You have a 20 percent down payment but plan to move in a few years.

Consider an adjustable-rate loan of five, seven, or 10 years. These loans carry a lower initial interest rate than on the 30-year fixed mortgage, so you save money over the fixed-rate period. After the fixed-rate period ends, borrowers typically refinance.

ARMs got a bad rap during the housing bust because most people who took out two- or three-year ARMs got caught with an unaffordable payment when their rates reset. They couldn’t refinance because home prices had tanked and credit tightened up. That risk still exists, but starting in September, lenders will have to evaluate whether borrowers can make payments after the rate resets.

■ You have at least a 20 percent down payment for a house worth more than $729,500.

You need a “jumbo’’ loan, which would not be backed by Fannie Mae or Freddie Mac. That means a lender who writes a mortgage above that amount has to keep the loan on its books. To compensate for that risk, lenders charge higher interest rates.

■You put more than 20 percent down.

Consider a 20-year fixed-rate mortgage. Rates are sometimes lower than for a 30-year fixed-rate by about a quarter-point. But because the loan term is shorter, the monthly payment will be higher.

■You have less than a 20 percent down payment.

Consider a mortgage insured by the Federal Housing Administration A borrower needs to put down only 3.5 percent. After the housing market slumped, the FHA became the major source of funding for first-time buyers.

■You don’t have a down payment.

Your options are limited. If you are a veteran or the surviving spouse of one, consider a mortgage backed by the Department of Veteran Affairs. These loans offer 100 percent financing without private mortgage insurance at competitive rates.

If the home you’re buying is in a rural area (as defined by the Agriculture Department), you may qualify for a loan that offers 100 percent financing.

J.W. Elphinstone Boston Globe July 15, 2010

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