You’ll spend more on your mortgage than you ever will on your house. Your home loan could be the biggest purchase you ever make. Doesn’t it make sense to choose it carefully?

Here’s an overview of the different types of home loans. Happy hunting!

Fixed rate mortgage
Fixed-rate loans dominate the market more than ever right now, and for good reason: They’re cheaper than they’ve been in three decades. The percentage difference between variable-rate and fixed-rate loans has narrowed, too, and the spread usually isn’t enough to justify giving up all those years of fixed-rate security.

Long-term, fixed-rate loans are good for people who can comfortably qualify for the loan they want, and who expect to stay in their homes for many years. But how long do you pay? Many baby boomers are now refinancing mortgages with 15-year, fixed-rate loans assuming they’ll make their last payments by retirement.

For example, if you borrow $150,000, you could pay it off at 6.75% in 30 years at $973 a month, with total interest costs of $200,243. Or you could borrow the same amount at 6.5% for 15 years and pay $1,307 a month, with total interest costs of just $85,199.

Adjustable-rate mortgage
Borrowers who are willing to sacrifice the long-term security of a fixed-rate loan can get a lower interest rate and start with lower payments if they take an adjustable-rate mortgage (ARM). That’s a particular benefit for two types of borrowers: those who expect to move within five years and those who may want the slightly lower rate to help them qualify for the loan that puts them into the house of their dreams.

ARM borrowers, however, sacrifice simplicity. The interest rates on these mortgages rise and fall along with market interest rates, and, if you’re not careful, you can find your monthly payment rising higher than your ability to afford it. Several variables determine whether an ARM is a good deal. Here are the most important:

Your index: Interest rates on ARMs are linked to several common money-related indexes that lenders use. Most common is the rate on one-year Treasury securities, but many mortgage lenders offer their customers choices. Two popular options are the often-lower but more volatile London InterBank Offering Rate (LIBOR) and the slightly higher but less volatile Cost of Funds Index for Western banks in the Federal Reserve’s 11th District. The Wall Street Journal prints most of these rates; ask your lender where else you can look up such figures. There’s no clear-cut winner; choose the index that offers you the best rate with the least volatility. You might have to accept a little more volatility if you want to get the lowest rate.
Your frequency: How soon and how often will your rate adjust? If you expect rates to rise, you’d rather have a slower adjustment period and a longer stretch of time before it starts adjusting. Most common today are ARMs that adjust every year; you also can find those that adjust every three or even every five years.
Your rate cap: Most ARMs carry limits on how high their rates can be adjusted at any one time, and on how high they can go overall. To evaluate an ARM, assume skyrocketing interest rates just to make sure you can afford the bad news. A typical structure today includes a 2-percentage-point cap on annual increases, with a 6-percentage-point cap over the life of the loan. If you start with a 6% loan, for example, it could go up in 2% increments per year to 8%, 10% and 12%. Once it hit 12%, it could go no higher. Of course, that rate would be lofty enough to double your interest.

Variations
What if you have a steady income but little down-payment cash? Enter Fannie Mae, the nation’s largest source of home mortgage funds. It buys mortgage loans and creates new products designed to keep money flowing into the mortgage market.

Fannie Mae’s “Flexible 97″ mortgage allows borrowers to limit their down payment to 3% of the cost of their home, and—contrary to most lending plans—to get that 3% as a gift from parents, employers, or other family members.

Flex 97 is just one of many loans on the market today aimed at putting buyers into homes. Borrowers who have cash flow but little or no savings, savings but no cash flow, poor credit ratings, and other special situations can find their own best mortgages by checking the following types of loans:

Balloon mortgages: These loans often carry monthly payments as low as those of 30-year mortgages. But they’ll usually come due for payoff in five or seven years.

These can be great loans for homeowners who know they won’t be staying put, but who like the certainty of a fixed rate. They’re risky for someone who stays in a home beyond the term of the loan, because then the homeowner will need to find a replacement mortgage, move, or make that big balloon payment.
Hybrids: When you cross a balloon mortgage with a fixed- or adjustable-rate mortgage, you get a hybrid. These loans stay fixed for five or seven years, then convert to either fixed-rate or variable-rate mortgages. They have lower rates than fixed-rate mortgages, but they carry the risk of having the last 25 years of the loan being an unknown.

Again, they’re good for people who like fixed payments, who need wiggle room on the rate to qualify for the loan, or who expect to move before the fixed part of the loan expires.
Low-doc and no-doc: “Doc” stands for documentation. If you’re self-employed or have a complicated financial situation, you might shoot for one of these loans, especially if you’re in a hurry to get into a particular house or if your income is rising rapidly.

Instead of asking for tax returns, business statements, and other paperwork a borrower might be expected to provide, low-doc lenders are willing to make the loan fast and easy. But it comes at a price—maybe one-half percent more, or even a full percentage point.

These loans are for borrowers with good credit ratings who are shopping for loans worth 75% or less of the home’s value and are willing to pay higher rates in exchange for quick-and-easy approval.

Where’d my low rate go?
Avoid any lender that promises one rate, then gives you another. One standard bait-and-switch tactic is to advertise a low, low rate, then tell customers that it only applies to certain borrowers or that the rate has already changed.

The non-committal loan commitment
A lender may quote you a rate over the phone, then quote you another in person. Ask for a loan commitment in writing.

Consistent loan documents
Make sure they match your written loan commitment from the lender.

Settling settlement issues
Your lender must give you a good-faith estimate of closing costs within three days after you apply for a loan. Any significant change is cause for complaint and possibly legal action. Any agreements with the seller to pay closing costs should be in writing, preferably in the purchase contract

APR
Annual percentage rate (APR) is the cost of the loan plus note rate and fees, expressed as a yearly rate. May be a half-percentage point higher than the loan rate.

Closing costs
When they complete a real estate transaction, buyers pay the lender’s fees and costs for home inspection, recording the deed, title insurance, attorney’s services and state or local taxes. Sellers pay different closing costs.

Lenders costs
Buyer pays the lender’s fees.
Commitment
A written statement from a lender that specifies the amount it’s willing to loan you, at what rate and for how long.

PMI
Private mortgage insurance (PMI) is required on all loans greater than 80 percent. You don’t need it after you have 20 percent equity in your house.
Points
Points are loan origination fees. Each point totals 1 percent of the loan amount. Points increase closing costs, but can reduce the interest rate.

Some real estate agents don’t want to scare prospective listing clients away by telling them that selling a house can be tough, emotionally charged work. Consider this article a bit of tough love for home-sellers…your agent may be too polite to share this news with you, but it’s news you can use.

People sell houses for a variety of reasons, not all of them positive. Unemployment, a death in the family, job relocation: These are just a few of the not-so-good reasons a person might need to sell. And even if you are planning to move up to a better house, there’s something unnerving about selling the roof that has sheltered you and your family to the highest bidder. A sign goes up in the front lawn, and all of a sudden, your home is a commodity. Complete strangers are scuffing the hardwoods, hating the curtains and peering in your bedroom closets.

Here are some steps you can take to avoid becoming an absolute lunatic while your house is on the market.

Hire the right agent
Find a real estate agent you can stand. You will be entering a short term contractual relationship with whoever lists your house—consider this person a hire, and hire someone you get along with. Ask them how they plan on marketing your house—what publications do they buy ads in? Will they print brochures? Do they put listings on the Internet? What type of outdoor signage will they put up? An agent who’s asking full commission should do more marketing than merely putting your home in the local Multiple Listing Service. It’s a good idea to get clear on what kind of sales effort you can expect before signing on the dotted line.

Get the most from open houses
There’s one form of marketing that sellers tend to overrate: Open houses. This weekend ritual is more useful for introducing agents to prospective buyers than it is for selling a home. An open house might generate some interest, but realize that a lot of people hit the open house circuit to check out décor, get ideas for remodels, and to dream.

There is one type of open house that is highly useful—an agent’s open, where local real estate agents are invited to tour your home. These are the open houses most likely to generate a buyer, and less likely to generate stress. Expect the agent you sign with to do a couple of agent’s opens: one where they bring the agents who work in their office on a tour of your home, and another when they bring local agents from other offices through. A final note on allowing strangers access to your house: Do put small valuables, jewelry and the like away in a safe deposit box before putting your house on the market.

Follow your agent’s advice on whether you need to be present for open houses and showings. Generally, it’s good to have an owner present for the agent’s open to answer questions about the house. Owners shouldn’t linger during public open houses, or when agents are showing prospective buyers the house. Leaving during showings accomplishes two things: It allows prospective buyers to truly shop your house without fear of offending you. It also protects you from the temporary insanity of hating the strangers who hate your carpet. Most real estate agents aren’t this blunt so we’ll say it—excessive hovering by an owner scares potential buyers away.

Here are a few other things your agent may be too polite to tell you:

If you smoke in your house, it will be much harder to sell. Consider having it professionally cleaned, carpets to drapes, and repainted on the inside. Smoke outside while the house is on the market.
Do you have pets that come inside? Does your house smell like your dog or worse yet, cat urine? Pet odors repel buyers, and be aware of the fact that people who don’t have pets are far more sensitive to pet odors than pet lovers are. In other words, you may think your house smells fine, but it might be really stinky.
Clean up for gosh sakes! Let’s face it—nobody’s perfectly clean all the time, but let your inner Martha Stewart or Felix Unger come to the surface while you’re marketing your house. Get rid of clutter—even if it means doing some of your packing early. Keep countertops and bathrooms shiny. For some reason, there’s nothing more off-putting than some other families crusty toothpaste on a bathroom sink. Nobody’s going to declare, “Heck, I would have bought that house at full price until I saw the hairball on the floor of the tub.” But a clean, nice smelling house speaks volumes on an emotional level, and will sell itself in a way that a dirty, funky place never will.

Be prepared for unexpected costs
So, you’ve got an offer you’re ready to accept? Don’t buy that magnum of champagne yet—that money may need to go toward some home repairs. This is the ultimate rub when selling your home: meeting the terms and conditions the buyer may request. In plain English, this means you may be required to fix problems that you’ve lived with for years in order for the sale to be completed. That burned out rear-left burner on the stove that you’ve endured for years? You can bet that the buyer will want that repaired. The mossy roof that adds character? The buyer will want it replaced.

These negotiations sting on two fronts: Firstly, there’s the implied judgment about your living conditions. Secondly, you’re being asked to spend money on a problem that you’ve lived with, so someone else can enjoy the fix. The solution? Swallow your pride and be honest with yourself about the condition of your roof, and other major systems in your home. And fix that back burner now if it will really chap your booty to have to repair it later for someone else.

In the best case scenario, if you last through listing, and sell your house, you may be a buyer later on. And buying a home is generally a lot more fun than selling one.

Housing prices may decline, but Alan Greenspan doesn’t expect “anything resembling a collapsing bubble,” the Federal Reserve chairman told the House Financial Services Committee on Thursday, according to the Washington Times.

“I think we’re running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide,” Greenspan told the committee, the Times reported.

Greenspan said there are housing-price bubbles in certain areas and that prices may go down. “I do believe it is conceivable we will get some reduction in overall prices, as we’ve had in the past, but that is not a particular problem,” Greenspan said, according to media reports.

Greenspan was responding to U.S. Rep. Scott Garrett (R-N.J.), who told Greenspan he’s buying a house in Washington, D.C., reports said.

“The bubble is about to burst as soon as I buy my home down here,” Garrett reportedly lamented. Washington, D.C., is one of the many areas nationwide where home prices have jumped significantly.

In his testimony, Greenspan said homeowners have accumulated considerable wealth because of the rapid run-up in the value of their homes in recent years, media reports said. He commented that many have been tapping into that wealth through home sales, cash-out refinancings and home-equity loans

February 17, 2005 - Legislation introduced yesterday by Sens. Olympia Snowe (R-Maine), Jim Talent (R-Mo.) and Christopher “Kit” Bond (R-Mo.) that would allow as many as 2 million working families who are currently uninsured to obtain health coverage at an affordable cost received a strong endorsement from the nation’s home builders.

“S. 406, the ‘Small Business Health Fairness Act,’ is a bipartisan measure that would provide our members with greater options to secure stable and affordable health care coverage for their employees,” said NAHB President David Wilson, a custom builder from Ketchum, Idaho.

Other original cosponsors include Sens. Robert Byrd (D-W. Va.), Elizabeth Dole (R-N.C.), Kay Bailey Hutchison (R-Texas), Mel Martinez (R-Fla.), John McCain (R-Ariz.) and David Vitter (R-La.).

Earlier this month, similar legislation (H.R. 525) that would allow small businesses to band together to form association health plans was introduced in the House by Reps. John Boehner (R-Ohio), Sam Johnson (R-Texas), Nydia Velazquez (D-N.Y.) and Albert Wynn (D-Md.).

President Bush has indicated he intends to make passage of association health plan legislation a key component of his domestic policy agenda for 2005. During his State of the Union address on Feb. 2, Bush urged lawmakers to create “association health plans for small businesses and their employees,” and at public appearances in Washington and around the country he continues to call for congressional action on the plans.

The U.S. Census Bureau estimates that there are roughly 45 million uninsured Americans today, up from 41 million four years ago and 43.6 million in the past two years. More than 24 million of these workers are employed by small businesses.

“Many of NAHB’s 220,000 member-firms consist of small business employers who have experienced dramatic increases in health insurance premium costs in recent years, making it difficult to provide quality health insurance at an affordable price. Association health plans will put small businesses on an equal footing with large employers and unions when it comes to negotiating lower insurance costs. In short, they will bring Fortune 500 health benefits to Main Street small businesses, their employees and working families,” said Wilson.

Housing starts jumped 4.7 percent in January to a seasonally adjusted annual rate of 2.159 million units, the highest pace in 21 years, the U.S. Commerce Department reported today. January’s housing starts also were 11.6 percent above the pace of a year ago.

The pace of single-family home construction reached an all-time high of 1.760 million units. This was 2.7 percent above the December rate and 12.5 percent above January 2004.

“Builders are striving to keep up with demand, and with mortgage rates and other market conditions still very favorable, they see strong months ahead,” said Dave Wilson, president of the National Association of Home Builders (NAHB) and a custom home builder from Ketchum, Idaho.

“There’s no question that this is a demand-driven housing market right now and that builders are reacting to it,” said NAHB Chief Economist David Seiders. “The single-family market, in particular, is crying out for supply, and increases in house prices are symptomatic of a market that’s being buoyed by demand while constrained by land-use controls in many areas.”

Multifamily housing starts increased to a seasonally adjusted rate of 399,000 units in January, 14.0 percent above the December pace and 8.1 percent above a year earlier.

Construction of new homes and apartments increased in the South by 18.8 percent and in the West by 1.9 percent for the month, but declined in the Northeast and Midwest, regions that were slammed by winter storms. Construction in the Midwest fell by 12.5 percent and in the Northeast by 23.9 percent in January.

Issuance of total building permits increased 1.7 percent from the upwardly revised December pace to a seasonably adjusted rate of 2.105 million units. Single-family permit issuance increased 0.7 percent to a rate of 1.624 million units, the second-highest pace on record.

Buy with no credit!” shrieks the headline on the Web site. A photo of a sprawling house posted on the site bears the caption, “We secured this beauty for only $1 down!”

For $197, the site offers an e-book that will teach readers how to buy a house with no money down and no credit check. And there are other sites and salesmen with similar promises. Is it really possible to buy for no money down and no credit check?

According to industry experts, the answers are “yes” and “probably not.” Yes to the “no money down,” but as to the “no credit check,” they say it’s unlikely.

“Typically those who can qualify for 100 percent financing loans are very high-credit-scoring households,” said Doug Duncan, SVP of research and business development and chief economist for the Mortgage Bankers Association.

“You certainly can get a 100 percent loan-to-value loan, but you have to be a very high-wealth, high-income household with good credit,” Duncan said.

“I suppose if you were paying cash, you could buy with no money down and no credit. I’m trying to think of who would make you a loan with no credit check and no money down,” Duncan said. “One possibility might be if an individual gets a co-signer. You don’t have a credit history but a family member or someone who knows you might be willing to co-sign. That sounds like a stretch, though.”

No-money-down loans are not as unusual as one might think. American Advantage Mortgage Co., for example, offers a 100 percent financing loan.

“The benefits of these loans to high-worth individuals are that often their funds are tied up in investments and they don’t have to liquidate investments in order to fund a down payment,” explained Devon Callan, a loan officer with American Advantage. The loan does require a credit check.

Another no-down-payment loan on the market actually offers 103 percent loan-to-value, 100 percent financing and 3 percent for closing costs.

The loan was designed for the Northern California market and is offered by the Home Loan Group, a joint venture between Chase Home Finance, Chase’s mortgage company, and Prudential Realty. The loan offers a fixed rate for an initial five, seven- or 10-year period based on prevailing interest rates. Then it rolls into an adjustable rate.

Desmond Smith, senior vice president of Chase Home Finance, emphasized that the loan does involve a credit check. “It’s a full documentation loan and obviously we will do a credit check,” Smith said.

The people most likely to obtain loans without down payments are either the very wealthy or the poor, Callan said.

“There are government programs designed to help low-income people buy homes that allow them to do so without a down payment,” Callan said.

“There are also government programs for people who don’t have conventional credit, through Fannie Mae, Freddie Mac, the FHA,” Callan said. “You demonstrate that you have paid your rent on time and meet other requirements.” While this approach isn’t traditional, it still is a credit check.

Callan said generally people should use their Realtors and brokers as primary sources of information on home-buying issues such as financing.

If this is the case, why pay for expensive e-books and seminars?

I am not quite sure Realtors are experts in creative real estate technologies,” said T.C. Bradley, president of New Life Vision, a Cape Coral, Fla.-based online investment seminar company that promises to teach consumers how to buy with no down payment or credit check.

“Loan brokers certainly do have access to programs for the credit-challenged. There are quite a few that are very familiar with creative real estate technologies. But they are not in the business of teaching people how to structure a deal and get a homeowner to accept it,” said Bradley.

New Life Vision’s Web site offers $197 e-books on how to buy houses without a down payment or credit check. The 3-year-old company has been a member of the Better Business Bureau of West Florida since April 2004 and has a satisfactory record with the Bureau, with no customer complaints.

Asked if it is possible to buy a house with no money down and no credit check, Bradley said, “There are several forms of owner financing that allow you to do just that. Lease purchase, land contracts, to name a few that allow a person to have an ownership interest in a home without securing a conventional mortgage. To say that any of these methods require a credit check would not be true.”

Callan said, “Lease purchase means a renter being able to buy via rent payments, which is unlikely. Other than that, he’s talking about hard money financing, which means going to a private investor. It may be an option for some. However, it’s very expensive. Right now on a 30-year fixed (mortgage) you pay around 5 percent. With a hard-money investor, it might be 8 or 9 percent.”

According to Duncan, “The market is endlessly creative and that is a good thing. It is also, therefore, incumbent on consumers and investors to do their homework and have a clear understanding of the characteristics of the obligations they take on.”

Do you believe that you can’t borrow money to buy a house if you have some dings on your credit? Do you think it’s always best to pay off the mortgage early, if you can? If so, you subscribe to mortgage myths that can cost you money. Here are six common myths.

Myth 1: A 30-year fixed mortgage is always best.
Myth 2: Pay off that mortgage as soon as possible.
Myth 3: You need a big down payment.
Myth 4: You’re stuck with PMI.
Myth 5: Dinged credit? No mortgage for you!
Myth 6: Refinancing means a new 30-year countdown.

Myth 1: A 30-year fixed is always the best way to go.
Adjustable-rate mortgages, or ARMs, constitute one-third of home loans these days. Yet rates on 15- and 30-year fixed-rate mortgages are very low by historical standards. ARM rates are even lower, but they could rise when it’s time for them to adjust.

“You’re going to hear a lot of financial journalists who say these ARMs are dangerous, you’re putting your house at risk, you’re crazy to take an ARM at this time of historic lows,” says Bob Walters, senior vice president for Quicken Loans. “There’s a lot of emotion involved. As with any emotional argument, there’s some truth in it.”

It’s true, Walters says, that a long-term, fixed-rate mortgage is the right loan “if somebody says, ‘I’m going to be in that house forever.’ That’s an automatic 30-year fixed.”

But the average homeowner stays in the house about nine years. First-time home buyers, who usually are young and have expanding families and growing incomes, are likely to remain in their starter homes for just a few years before moving on and up.

Adjustables, especially the popular hybrid adjustables that carry an introductory rate that lasts three, five, seven or 10 years, are appropriate for those whom Walters calls “upwardly mobile people, people who are transient, people for whom a payment increase wouldn’t be the end of the world.”

Myth 2: Pay off that mortgage as soon as possible.
Accelerating mortgage payments is another area where emotion often trumps reason, Walters says. “We’re not talking about finances; we’re talking about psychology, or at least where the two meet,” he says.

Walters advises people to imagine a scenario where they have a 5- percent ARM and are able to deduct the interest from their federal income taxes. That lowers their effective interest rate to somewhere in the neighborhood of 3.75 percent. Instead of paying extra principal on such a mortgage, it makes more sense to pay down higher-interest debt, such as for credit cards and auto loans, or to invest the money where it can earn a return greater than the mortgage interest rate after taxes.

“The way people deal with money and risk is often irrational, and they put much more of a premium on security and safety than they do on getting a return,” Walters says.

It’s perfectly fine to pay off a mortgage early if doing so satisfies a long-term financial goal. Doug Perry, senior vice president of Countrywide Home Loans, says a lot of aging baby boomers want to eliminate their mortgage debt so they can retire debt-free. That makes sense, especially for retirees who won’t exceed the standard deduction on their income taxes and therefore won’t be able to deduct their mortgage interest.

Myth 3: You need a down payment of 20 percent or at least 10 percent.
“The perception out there – that you need 10 percent down at least, maybe 20 – that’s completely incorrect,” Perry says. Many lenders have lots of loan programs for people who can afford to pay 5 percent down or less – including zero down. In the mortgage industry’s horse-and-buggy days, the only zero-down loan was available from the Veterans Administration. That’s no longer the case.

“A lot of people are caught in a cycle where they’re paying a lot every month for rent and are paying bills on time, and they don’t have a lot of money to save,” Perry says. “They think they’re trapped in the renting cycle with no way out, but they have several options.” That takes us to the next myth.

Myth 4: You have to pay mortgage insurance if you don’t have enough money for a 20 percent down payment.
“What’s called ‘piggyback financing’ is now almost 50 percent of home purchases,” says Peter Bonnikson, senior vice president for E-Loan. A piggyback loan lets you avoid paying for mortgage insurance.

Piggybacks consists of two loans. The first is for 80 percent of the purchase price. Then there’s a second “piggyback” loan for the rest of the purchase price, minus the down payment. An 80-10-10 mortgage has a 10 percent down payment and a 10 percent piggyback loan; an 80-15-5 has a 5 percent down payment and a 15 percent piggyback loan; and an 80-20 doesn’t have a down payment at all.

The piggyback loan has a higher rate than the primary mortgage for 80 percent of the price. But for people with good credit, piggyback financing usually costs less than getting one mortgage for more than 80 percent of the price and then paying for mortgage insurance.

Bonnikson favors piggyback loans because “one, they can maximize the house that they can buy, but two, they also maximize the tax deduction.” That’s because the mortgage interest on the piggyback loan is tax deductible, whereas mortgage insurance premiums are not. (An attempt this year to extend the tax deduction to mortgage insurance failed in Congress.)

Walters says: “There’s two reasons why some lenders would push people to take PMI” – private mortgage insurance. The first reason is that the lender doesn’t offer piggyback loan programs, “so limited options make for clear choices.” Other lenders have investments in mortgage insurance companies, so they profit from increased business, he says.

Myth 5: You can’t get a mortgage if you have blemishes on your credit.
“This is a country that believes in redemption,” Bonnikson says. “More and more lenders are finding ways to lend to people” with flawed credit histories.

The word “subprime” is used to describe loans to people who have credit problems that are serious enough to justify charging higher rates. The lender demands a higher rate to compensate for the higher risk. About one-third of households fall into the subprime category, says David Herpers, director of consumer affairs for mortgage lender Amerisave.

One or two 30-day-late credit card payments won’t push you into subprime territory, but bankruptcy, foreclosure, repossession, a habit of paying bills late, and even eviction from an apartment can turn you into a subprime customer. A short, sparse credit history – a recent immigrant or a college grad – might be counted as subprime, too.

“Most people start out with prime credit and something goes awry and they’re considered a subprime candidate,” Herpers says. “Many of the customers we deal with today are subprime and they know they’re subprime and they’re seeking a subprime lender today.”

About one-quarter to one-third of Amerisave’s customers fall into the subprime category, and the company’s goal is to increase that share to more than half of its business in 2005. There is a benefit to applying for a loan from a company that does prime and subprime loans: You’re less likely to be steered into a mortgage with a higher rate than you deserve to pay.

When a consumer applies at Herpers’s company and acknowledges having credit problems, “we will pull their credit and analyze their credit, and if they can be approved for prime, we will approve them for prime,” Herpers says. And someone with several late credit card payments will get a better mortgage rate than someone with a recent bankruptcy.

Bonnikson says, “Lenders are looking for ways to help people who have had financial difficulties. If you have damaged credit, there are a lot of lenders who are willing to help you. My advice is you really need to do your homework and you need to talk to several lenders.”

Myth 6: The term of the mortgage has to be the term on the note.
Lots of borrowers are reluctant to refinance because they don’t want to start all over again with a new loan that’s due to be paid off in 15 or 30 years. But you can ask the lender to set you up with a shorter payment schedule.

Take the example of someone who got a 30-year mortgage in 1998 and wants to refinance in 2004 at a lower rate. It’s a simple matter to ask the lender to amortize the payments so the new loan will be paid off in 2028, when the original loan would have been retired.

“Your payment will be lower than it was before, and you’ll save monthly – and over the same period of time,” Walters says.

You can’t blame Jerry Zarella for feeling like a winner in America’s housing sweepstakes. For seven months, there was no interest in his 7,500 square-foot, four-bedroom estate in East Greenwich, R.I.

Then in April, the high-end market caught fire and Zarella was choosing among three offers, all starting at his $2.5 million asking price. “There was movement on all three, but one fellow went $100,000 more,” said Zarella. “So it’s kind of tough to say no. I was delighted.”

Housing prices across the country are through the roof — up more than 7 percent in 2003, spurring fears of a bubble.

Some 18 miles south of Boston, in Hingham, Mass., where the market is as hot as the harbor is cold, real estate agent Gail Petersen Bell hears those worries from buyers all the time. “We talk about it,” she said. “They acknowledge it … and then they buy anyway.”

Why? Because homes have been Americans’ best investment.

In Hingham, Bell says houses have appreciated 10 to 12 percent in each of the last five years. That’s good news for sellers but makes it even tougher for buyers.

“There are no bargains,” said Bell. “And it is not a buyer’s market. It has continued to be a seller’s market.”

Pamela Copeman is caught in that catch-22. “The good news is that our home has appreciated and it’s worth a mint,” she said. “The bad news is that anything we’re looking at is worth a mint and a half.”

Real estate agent Bell says, as a consequence, bidding wars are common in Hingham. Her office has been involved in at least half dozen in the last six months — one particularly memorable. “It had four offers on it,” she said. “And it ended up selling for about $70,000 over the asking price.”

Not only are prices rising, but mortgage rates are rising, too — creeping up from February’s historic lows, to now well over 6 percent.

Professor Bill Wheaton tracks real estate at the Massachusetts Institute of Technology. “I think price appreciation will slow as interest rates rise, because fewer people will come into the market,” he said. “But at the same time the people who are in the market will not be pushed out because they are protected by fixed-rate mortgages.”

Wheaton doesn’t see a crash, but real estate agent Bell says higher rates will cool this seller’s market. “As long as we stay under 8 percent, we’re still going to see a very active mid-range market,” said Bell. “Beyond the 8 percent, for some reason, that’s a psychological barrier for many people.”

For more than half of card-carrying Americans, plastic is a mixed blessing. Right now, 44 million households—57% of all card users—carry card balances that average $8,025 month to month. At an average annual interest rate of 17.1%, that generates interest payments of about $114 a month for each household. For some families, monthly debt payments may be little more than an annoying inconvenience. But consider this: The same amount invested on behalf of your child (assuming an 8% total annual return for 18 years) would amount to $54,989 by the time he or she is 18. Although the credit card seems to have become a national addiction, these are effective ways to get that monkey off your back:

1. Create a repayment plan.
Tackle the worst first. If you have an account that charges 20% interest and another that charges 12%, pay off the costlier account first. But don’t look to your retirement savings as a source of cash to repay your debt. You’ll lose a hefty chunk of the money to pay federal and state taxes and an early-withdrawal penalty, and you could be jeopardizing your future financial stability.

2. Call your creditors.
Tell your creditor that you’d like to set up a repayment plan—doing so shows a creditor you’re taking responsibility for your debt. At the same time, bargain for a better deal. Don’t be afraid to negotiate with your credit card company, which may be willing to bend a little in the hope of getting back its money. Some lenders, for instance, will freeze interest on outstanding balances in return for automatic monthly payments.

3. Follow your money.
This can be a labor-intensive job requiring detailed notations of every expenditure until you have a firm grasp of how much you’re spending on nonessentials. But it’s a key step in taking control of your financial life. So add up your bills, tabulate what you owe, and measure your debt load against your income.

4. Build a debt-free balance sheet.
Easier said than done? Start by cutting up all of your credit cards (though you might wish to keep the lowest-rate one for emergencies). Instead of using plastic, use cash or a debit card.

5. Draw up a better budget and stick to it.
Make a plan you can live with, but keep in mind that the more lifestyle changes you can make, the sooner you can be back on track. Likewise, forcing yourself to make drastic lifestyle changes may be setting yourself up for failure, just as in a diet. Consider getting moral support through an organization such as Debtors Anonymous, which sponsors weekly meetings nationwide for people to come and talk in confidence about—and deal with—spending problems. The primary purpose of Debtors Anonymous—which charges no dues—is to help people “live without incurring any unsecured debt, one day at a time.”

6. Find out what your creditors are saying about you.
Credit reporting agencies collect information on how you’ve handled bills in the past and how much you owe today. They make that data available to lenders, who often use it to decide whether you’re creditworthy. What’s done is done, so don’t expect to erase a missed payment. But creditors can make reporting mistakes, and if there are some on your report, you have the right to correct them. To check the accuracy of your credit history, contact these three main reporting bureaus for a copy of your latest report: Equifax, Experian, and Trans Union.

7. Avoid quick-fix “credit-repair” services.
They’ll charge you, but very few will genuinely help. Worse, many are costly scams.

8. Consult a reputable pro.
Most cities in the United States have debt-counseling agencies that will lay out a debt-reduction plan and negotiate a repayment schedule with lenders. Often, these services collect a percentage of the repayment from the lender and charge clients little or nothing in fees.

The National Foundation for Credit Counseling, a network of 1,450 “neighborhood financial care centers,” is one source of help. Certified consumer credit counselors will review a consumer’s debts and assets and draft a debt-management program, which spells out how the consumer will repay creditors. If creditors and the consumer agree, the systematic plan goes into effect, and the consumer makes one payment monthly to the agency. The agency then sends money to participating creditors. It typically takes 48 months to pay off debt with this program. Another agency is the Internet-based Myvesta.org, which offers low-cost credit counseling

Very few things in life are quite as exciting as buying your first home. It’s part of the American dream. And although home prices keep rising, ownership is within the realm of possibility, even for those who don’t make humongous salaries. Of course, the larger your down payment, the lower your monthly payments. And if you can come up with 20 percent, you avoid paying expensive private mortgage insurance (PMI).

Why you want to avoid paying PMI: PMI typically costs about 1/2 of 1 percent of the loan. For example, if you put down 10 percent on a $100,000 house ($10,000), your annual PMI costs will be $450. And, these payments are not tax deductible. If your down payment is less than 20 percent of the sale price, you must take out PMI. Learn more about PMI here.

Here are seven ways to begin on your mission of ownership…

Step one: Get with the program

The first step toward saving enough money for a down payment is a psychological one—desire. You (and your spouse or friend) must REALLY want to buy a house. With enough passion for ownership, you’ll find yourself motivated to save every penny you can.

To boost your desire, spend a weekend looking at houses or condos within what you think is your price range. Saving will be a whole lot easier if you have a vision of a two-bedroom, two-bath house with white shutters on Elm Street dancing in your head. This vision will make it easier to say no to shopping sprees, buying a second car or going on an expensive vacation.

Take pictures of your favorite properties and tape them to your refrigerator door or better yet, prop them up on your desk next to your checkbook.

Step two: Review your budget

Or, if you’re budget-free, draw one up. Get help making a budget here. Then list those areas where you can cut back on spending and earmark that money for your special Down Payment Account (DPA). Don’t cut out everything that’s fun … you want to enjoy life BH (Before the House), but do start to be more cautious.

Here are some savings tips to get you in the right frame of mind. Add your own to the list.

Drive at the speed limit. Traveling at 65 mph versus 55 mph increases fuel consumption by a whopping 20 percent. (GM Motor Club)
Clip coupons. If you save $25 a month with food and drug coupons, that turns into $360 a year.
Take your lunch to work. If you’re spending $8 a day on a sandwich, Coke and an ice-cream cone, that’s $2,000 a year, assuming two weeks out for vacation. And that’s not counting those in-between snacks of chips, pretzels and cappuccino. Figure out what you spend per day on lunch; then on the days you brown bag it, put that amount into your DPA.
Carpool. Or, walk, bike or take the bus to work. Taxis are a guaranteed way to spend $5 in five minutes.
Talk less. Make sure you have the cheapest calling plan. And if you make a lot of long distance calls, get a prepaid phone card.
Skip the babysitter. Set up a co-op arrangement with friends and neighbors.
Stop smoking. Quitting a pack-a-day habit will save you about $1,095 a year.
Cut back on dining out. Send the amount you save to your DPA.
Never open a catalog. Toss them out immediately. If you peek inside you’re bound to find something you like.
Don’t carry much cash. If you leave your ATM card, your credit card, your debit card, your checkbook, and most of your cash at home, it will be hard to spend much. Instead, carry enough cash for the day plus one bank check and for emergencies, several traveler’s checks.

Step three: Open a DPA

You’ll need a special account to hold your savings, such as a high-yielding bank savings account or certificate of deposit (CD).

Keep in mind that bank CDs have a definite advantage over a money market or savings account: The money in a CD is tied up until it comes due. In other words, you’ll be penalized if you take the money and run before the maturity date. Bottom line: You’ll be less apt to use this money for something other than your house. CDs come in a variety of maturities from one to five years. Figure which time horizon matches your ownership goal.

$Tip: Be sure to read Certificates of Deposit: Tips for Investors, a free SEC publication. Find it here.

Step four: Tell your family

If your parents or other relatives send you presents for your birthday, anniversary or the holidays, they might instead contribute to your DPA. Don’t insist—some parents prefer to shop for special gifts for their kids. However, it won’t hurt to let them know about your goal.

Step five: Go automatic

If you don’t see it, you won’t spend it. Arrange for a certain dollar amount to be taken out of each paycheck and automatically transferred to your savings or money market account at your bank or credit union. If you’re self-employed, set up the same type of plan at your bank and have money transferred each month from checking to savings or to a mutual fund.

Step six: Reduce credit card debt

Always pay at least the minimum due each month on your cards to avoid high interest rates. Better still: Pay each bill in full and completely avoid high rates on unpaid balances. And make certain you mail the check (or transfer the money) well in advance of the payment date. A growing number of credit card issuers are hitting customers with late arrival penalties.

$TIP: Ideally, you should wipe out credit card debt as quickly as possible. Begin by paying down the credit card with the highest interest rate first.

Step seven: Keep on a-paying

When you pay off a car loan or education loan or get rid of a credit card debt, continue to write a check for that same amount every month—but put it into savings. You’ve learned to live without that money, so now you can sock it away.

Fannie Mae (FNM/NYSE) recently announced that it will apply new conforming loan limits, as determined by the Office of Federal Housing Enterprise Oversight (OFHEO) based on federal data on mean (average) home prices, to increase its single-family mortgage loan limit to $359,650 for 2005.

As a result of the new loan limit, Fannie Mae estimates that in 2005, as many as an additional 271,524 homeowners would be eligible for a conforming loan.

Conforming loan limits may adjust annually. The conforming loan limits adjustments are based on the October-to-October changes in the mean (average) home price, as published by the Federal Housing Finance Board (FHFB). The FHFB figures come from its monthly survey of lenders. Both new and existing homes are included in the survey.

“This loan limit increase is great news for Bakersfield families who can take advantage of the savings provided by a Fannie Mae-financed mortgage,” said Polly Hamm, executive director of the Bakersfield Association of REALTORS®. “These new loan limits will help increase local homeownership throughout the Central Valley.”

Limits for multi-unit loans for 2005 will be as follows: two-family loans $460,400; three-family loans $556,500; and four-family loans to $691,600. The 2005 loan limit for second mortgages will be $179,825. The maximum amounts for one-to-four-family mortgages and second mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50 percent higher than the limits for the rest of the country.

Most loans Fannie Mae purchases are well below the conforming limit. Our average loan size for single-family properties in 2004 was about $160,000.

Sales Hit New Record High For Fourth Year In A Row

January 31, 2005 - Sales of new single-family homes for 2004 topped one million and set a new annual sales record for the fourth consecutive year, according to U.S. Commerce Department figures released today.

“Sales were up nearly 9 percent for the year and topped one million for the second year in a row,” said NAHB President Dave Wilson, a custom home builder from Ketchum, Idaho. “The record-breaking pace can be attributed to strong demographic demand, low mortgage rates and rising employment and household income, and we expect this pattern to continue into early 2005.”

Total new single-family home sales for the year reached 1.183 million, an 8.9 percent increase from the previous annual record of 1.086 million set in 2003. The pace of new-home sales for December reached a seasonally adjusted annual rate of 1.098 million units, up a slight 0.1 percent from November’s pace of 1.097 million units.

“The sales pace for the fourth quarter was almost identical to the third quarter, and while we anticipate a slight decline in 2005, the performance of the housing market has achieved a very high plateau,” said NAHB Chief Economist David Seiders.

All four regions recorded solid annual sales increases for 2004. Sales in the Northeast topped 83,000, the Midwest had 209,000 sales, the South posted 546,000 sales and the West registered 345,000 sales. For the month, however, the sales pace across all regions was mixed. The Northeast posted a 15.7 percent decline and the South was down 16.3 percent from the November rate. The Midwest and the West increased 55.5 percent and 6.3 percent, respectively.

The median sales price of new single-family homes increased 12.2 percent to $218,000 for the year, up from $195,000 in 2003.

The inventory of new homes for sale was 432,000 at the end of 2004, a 4.8 months’ supply at the December sales pace. “The inventory situation inched up during the final months of 2004 but, as in previous months, most of the recent increase has been for units permitted but not yet started,” Seiders said. “The inventory situation is not worrisome, particularly if builders keep the numbers of units that are under construction or completed under close control,” he added.

When a buyer puts 10 percent or less cash down, most lenders require mortgage insurance, known as PMI, which is paid for by the buyer. The cost of PMI is about 1/2 percent of the loan amount annually. So, on a $250,000 mortgage, PMI will run about $1,250 per year.

PMI provides protection for the lender in case the buyer stops making mortgage payments. Buyers don’t like PMI because it increases the cost of home ownership. Currently, unlike most mortgage interest paid on a primary residence, PMI is not tax deductible.

Low cash down buyers can avoid PMI by using piggyback financing. Here’s how it works. Let’s say you have enough cash to put 10 percent down on the purchase of a new home. If you borrow a mortgage for 90 percent of the purchase price, the lender will likely charge you for PMI.

Instead of taking out one mortgage, you combine two mortgages to come up with 90 percent financing and thereby avoid PMI. You could combine a 75 percent first mortgage with a 15 percent second mortgage. Or, you might combine a 70 percent first with a 20 percent second mortgage. You could save as much as $100 to $150 per month using piggyback financing, depending on the size of the loans involved.

You might wonder why anyone would choose to do financing that requires PMI. For some buyers, there’s no other choice. Piggyback financing requires good credit. Second mortgage lenders can be stricter than first mortgage lenders in their qualifying criteria. Typically, borrowers need a credit score of 660 or more to qualify.

Recently, piggyback financing has increased in popularity, even with buyers who have a substantial cash down payment. Many large cash down buyers are electing to establish an equity line second mortgage in order to have access to cash on a moment’s notice. There’s often no charge for initiating the loan. The annual fee should run around $75. You’re only charged interest when you write a check against the credit line. The interest rate is often tied to the Prime Rate. And you can usually make interest-only payments for up to 10 years.

House hunting tip: Piggyback financing can be used effectively as interim or bridge financing if you buy a new home before you’ve sold the old one. Recently a trade-up buyer had enough cash to put 15 percent down on her new home. For the long term, she wanted to have a first mortgage of no more than 60 percent of the purchase price. She borrowed a 25 percent equity line second mortgage to make up the difference.

During the period of time that she owned two homes, she made interest-only payments on the equity line in order to keep her carrying costs down. When her old home sold, she paid the equity line on her new home down to a zero balance. However, she didn’t close out the equity line. She retained it in case of an emergency. Note that some equity lines do charge an early closure fee during the first few years of the loan. However, if you pay the equity line to a zero balance, but don’t close it, there shouldn’t be a closure fee.

As long as you qualify, you can borrow up to $500,000 on an equity line second mortgage. And, you can use piggyback financing to finance up to 95 or 100 percent of the purchase price.

The closing: By using an equity line second mortgage for your piggyback financing, you can achieve a lower blended mortgage rate because the interest rate on an equity line is often substantially lower than it would be on a conventional mortgage.

There are two types of houses. There are “pretty houses” in excellent condition. But there are also the “fix-up houses.”

The sellers of “pretty houses” usually expect to receive a top dollar sales price. Such houses can be great places to live, but they usually don’t offer immediate profit potential.

However, sellers of “fix-up houses” are often grateful for any purchase offer. If the house is in very poor condition, mortgage lenders won’t even finance the sale. Sellers of these “really bad” houses often have no choice but to help their buyers by financing the sale.

What is a fix-up house? Some “fixer houses” just need minor cosmetic work. These can be great bargains if the asking price is substantially below those of comparable nearby homes in good condition.

A cosmetic fix-up house usually just needs paint inside and outside (paint is the most profitable improvement), repairing, cleaning, new carpets or floor refinishing, new light fixtures and fresh landscaping.

In his best-seller famous book, How I Turned $1,000 into $5 Million in Real Estate in My Spare Time, Bill Nickerson recommended a fix-up profit formula of spending $1 to increase the home’s market value by $2.

Not every fix-up house will meet this profit criterion. But it clearly doesn’t pay to spend $1 to increase the home’s market value by just $1 or less.

To earn profits, look for the “right things wrong.” As professional real estate improvers say, “Look for the right things wrong.”

That means house buyers who are looking for either a profitable investment, or a profitable personal residence, should seriously consider buying houses with the need for profitable cosmetic improvements such as those explained above.

However, unprofitable fix-up houses with the wrong things wrong include those with foundation problems, major structural defects such as horizontal wall cracks, need for an expensive new roof (some bad-looking roofs don’t cost much to replace), very old-fashioned kitchens and bathrooms that need major renovation, and serious soils problems.

For example, the house on the hill above my residence has been vacant over two years. It has very serious soil stabilization problems. Fortunately, my property is not affected.

The lot offers very little open space for a lawn or swimming pool. The one redeeming factor is a beautiful view. This is a classic example of a house with the wrong things wrong, starting with its bad foundation.

How to earn tax-free profits from a fix-up house. If you would like to earn up to $250,000 in tax-free profits every two years (up to $500,000 for a married couple), just buy a fix-up house at a bargain price, fix it up while living in it for at least 24 months, sell for tax-free profits up to the limits of Internal Revenue Code 121, and do it all over again every 24 months.

The only drawback is living in the residence while the profitable fix-up work takes place. This tax-free home sale fix-up profit method can be reused every 24 months.

Personally, my best fix-up house experiences have been in middle-class neighborhoods in decent quality school districts. No matter how nice you fix up a house, if it is in a bad quality school district, it will have limited appeal to prospective buyers.

Buy wholesale from a motivated home seller. The best way to profit from fix-up houses is to purchase at a below-market price from a highly motivated seller. That means the seller wants a quick sale and maximum profit is not important.

Strong seller motivations include job transfer, unemployment, illness in the family, death in the family, birth in the family, drug or alcohol problems, rental house absentee owner management problems, retirement, inheritance, and family problems.

A savvy buyer’s agent can often help arrange a profitable purchase, especially if you look like a repeat buyer with lots of future profitable business.

Before making a purchase offer, ask your buyer’s agent to determine (1) how long the seller has owned the property and (2) the seller’s purchase price. If the seller has owned the house a long time, that means the seller usually has lots of negotiation room for the sales price and terms.

Understand how to finance your fix-up house. Because the property is not a “pretty house,” the seller might be having difficulty finding a buyer. The solution could be to ask the seller to finance your purchase, at least for two years while you fix up the property to make it acceptable for a mortgage lender.

If the house has no existing mortgage, your first purchase offer should provide for seller finance terms. Even if the listing agent discourages you, make your offer anyway.

Personally, I’ve lost count of how many houses I purchased with seller carryback mortgage financing after the listing agent said the seller needed cash. Retiree sellers especially enjoy receiving a modest cash down payment, such as 10 percent, and a seller mortgage to provide for retirement income.

In today’s home sale market, for example, if you offer the seller a carryback mortgage at 5 percent or 6 percent interest, that’s a great investment for the home seller.

However, if the seller rejects your offer and if you have good income and good credit, your bank will probably approve your mortgage application, especially if it is for a short-term 5-year mortgage, which you expect to refinance after the fix-up work is completed.

Where do you find profitable fix-up houses? Every community has houses available that need profitable fix-up work. A sharp buyer’s agent is invaluable for locating these wholesale gems that offer profit opportunities.

Also, don’t overlook foreclosures, REOs (real estate owned by foreclosing lenders) and other distress properties. Driving around middle-class neighborhoods and jotting down addresses of potential fix-up houses can often produce results. Tell everyone you know that you are looking for a fix-up house in a good neighborhood.

How do you finance your fix-up improvements? After you own the house needing fix-up, if you have good income and good credit you can probably finance the fix-up work with a home improvement loan from your bank. Banks love home improvement loans because they are very profitable and the default rate is virtually zero.

If you anticipate a profitable quick resale within a few months, called a “flipper,” you might want to finance the improvements on your credit cards, bank credit lines, and even borrowing on a second mortgage from a “hard money” lender, such as the local loan shark.