Mortgage Shopping

When it comes to mortgages, whether you are buying a house or refinancing the one you have now, there are a few questions you need to ask yourself along with the ones that only a mortgage professional can answer.

How Long Will I Stay Here?

The first question is usually a hard one to answer but you need to do it because many of your future decisions will rest on this one question: How long do I plan to stay in the house?

The answer, which reveals your game plan, affects whether you would be better off paying points to lower your rate, whether you should get a fixed-rate or adjustable-rate loan, or whether you should accept a prepayment penalty. If you are thinking about refinancing, the answer to this will help you decide if you should refinance. If you haven't got a clue how long you will stay in the house, then bear in mind that the median duration in one residence (according to the 1998 Census) is 8.2 years. That means that half of homeowners move in 8.2 years and the other half stay in their homes longer. If you consider yourself to be "average", then you will likely spend about eight years in the house.

How Much is This Going to Cost?

The second question should be: How much are the costs of getting the loan? When you apply for a loan you will receive a document called the Good Faith Estimate of closing costs. This federally generated sheet estimates how much the lender will be charging for a number of closing costs, such as origination and discount fees, an appraisal, credit report, document preparation, title insurance, pest inspection and many others. Be sure to compare good faith estimates from the various lenders you talk to and note the line that reads "Estimated cash at closing". That number is a pretty good guess at what you'll be writing a check for when you get the loan.

When Will I Break Even?

If you're buying a home and you pay discount points to get a lower rate, ask yourself: How long will it take to break even? If the loan is for refinancing, figure out how long it will take to recover the closing costs from your monthly savings. Either way, you simply divide the upfront cost of either discount points (if you're buying), and all of the closing costs (refinancing) by the monthly savings you would get. Now you know how many months it will take before you break even. If the bottom line is five years to break even but you're only planning on being in the house for four years, then it isn't worth the effort.

How Do I Feel About This?

The next question to ask in this regard is: What makes me feel comfortable? This question has no right or wrong answer. People are different. Some want discount points and others don't. It doesn't bother them to break even in five years. The point is that it is a psychological factor; people have to be comfortable with their decision, whatever it is, and overall people function best within their comfort zones.

Can I Afford the Payments?

A very big and important question is: Will I be able to make the payments when I include all the monthly mortgage expenses? Principal and interest are only part of the monthly payment. There are a number of things to add to this number, such as private mortgage insurance, association fees, property taxes and homeowner insurance. After adding these costs in, you may find that what you can really afford is different from what you thought you could afford. On top of it all, you will need to plan for some sort of savings cushion that provides money for roof repairs, painting, fixing the driveway, and replacing the hot water tank. When these considerations aren't included the next step is into the debt mill.