With interest rates at their lowest levels in years, mortgage brokers and bankers are taking more calls than New York's quit-smoking hotline. But don't let the frenzy lure you into the wrong type of mortgage. You've got several options to choose from, and believe it or not everyone should go with a 30-year fixed-rate mortgage, even if it is at a rock-bottom rate.
To help you figure out which mortgage is right for you, we've created profiles of six common mortgage shoppers, from someone who is temporarily cash-poor to someone in search of a "jumbo" mortgage of more than $359,650 ($539,475 in Alaska and Hawaii). Everybody's situation, of course, is different and yours might not be perfectly matched here. But this approach is a good way to learn about who uses the different types of loans available and where the best place is to get them.
The Homesteader
You've just found a home in a nice neighborhood and you plan to stay there until your kids are through high school. Or maybe you're 65 and are buying your retirement home. In either case, you know you're not moving for at least a decade.
What you want: No doubt about it. In the current environment, you want a fixed-rate mortgage. Rates on a 30-year fixed-rate loan are incredibly low, and though a fixed rate still costs more than an adjustable-rate mortgage, the difference between the two is not that great. The price of stability, in other words, is relatively affordable. If your monthly cash flow permits it, you might consider a 15-year loan. The monthly payment is higher, but you pay less interest over the life of the loan.
Where to shop: Your first stop should definitely be a mortgage banker such as Countrywide Funding. Unlike mortgage brokers, with which these outfits are sometimes confused, mortgage bankers are not intermediaries between you and a lender; they are lenders. Mortgage bankers don't write a lot of adjustable-rate loans, because it's harder to package those for sale to organizations, such as Fannie Mae and Freddie Mac. Thus, because mortgage bankers make their money on fixed rates, their prices tend to be the most aggressive around.
The Relocator
You're never going to spend more than a few years in this house. Maybe your spouse has a thing about moving. Maybe you know you'll eventually need space to work from home. Maybe you're planning on high-tailing it to Montana in a few years. In any case, you're certain this isn't where you'll grow old.
What you want: You're a candidate for an adjustable mortgage or maybe a "delayed adjustable." Also known as 3-1s, 5-1s and 7-1s, these loans are fixed for their first three, five or seven years, then convert to a one-year adjustable. Another thing: You can buy a "conversion option." For a small fee and a slight premium on the rate, many lenders will allow you to convert your delayed adjustable to a fixed rate, as long as you do so before the loan starts adjusting.
Where to shop: Midsize banks and thrifts — which typically hold onto the loans they write — are the most aggressive players in the adjustable market. A few large banks will be competitive, too. Though they've always made most of their money outside the mortgage business, some, such as Chase and Ohio-based Charter One Bank, may be eager to sell you adjustable loans. Also, keep in mind that you may be able to get a better rate with them if you have other business, such as an in-house checking account, that you can bring to their table.
The Trader-Upper
The house you love comes with a hefty price tag — one that will require a mortgage of more than $359,650 (or $539,475 if you live in Alaska or Hawaii). You know you can qualify for the loan, and you've got a sizable down payment.
What you want: A jumbo loan. In the past, lenders didn't like jumbos because if one went bad, the effect was like losing five smaller mortgages. That's why rates were typically one half to a full percentage point higher. But now, because of rising home prices and low interest rates, the race to write jumbo loans has become the most competitive part of the market — and lenders no longer get away with charging so much for larger loans.
Where to shop: Large banks have traditionally been the leaders in jumbo loans, largely because they have much bigger loan portfolios. They are still good bets. Brokerage firms, eager to please their more moneyed clients, are a good bet, too. But the fact is, just about any lender wants to sell jumbos, whether it's adjustable, delayed adjustable or fixed.
The Temporarily Cash-Poor
You've found a great house, but qualifying for a big enough loan is a problem — for the time being. Maybe you're in your second year at the district attorney's office with a handful of offers to double your income in private practice. Maybe you're just about to finish paying your son's Harvard tuition. In either case, you know your disposable income is about to jump — and substantially.
What you want: The answer to your problem could be to "buy down" your loan, or pay another point or two up front to earn a lower interest rate. Then you can qualify for a bigger loan.
Consider what's known as a two-to-one buydown. You reduce the first year's rate by two points and the second year's by one point. In year three, the loan becomes fixed, and it stays at that rate for the life of the loan. That can help you buy a lot more house.
Where to shop: Buydowns are most commonly found at mortgage bankers, because they're typically an attachment to fixed-rate products, the mortgage banker's specialty. But they're not limited to mortgage banks. You should also try midsize banks and thrifts, which will allow you to open an interest-bearing savings account (funded either by you or a gift from a parent or other relative), out of which funds are automatically drawn to keep the borrower's out-of-pocket expense low for the first few years. Plus, if you've got a brokerage account, you might be surprised at what it can do for you. Several Wall Street firms, including Merrill Lynch, are writing a lot of mortgages these days — and they tend to be fairly flexible.
The High Earner/Poor Saver You've got a good job and you've found a house you adore. But you've been buried under student loans — or you've been traveling the globe without a care — and haven't been able to save for a down payment.
What you want: Fifteen years ago you had practically zero chance of getting 100% financing. Lenders were so nervous about it, the option wasn't even on the menu. But today it's a different story.
The money in 100% financing these days usually comes bundled as a so-called 80-20 loan, or "piggy-backed second." That is, there's a first mortgage for 80% of the total and a second mortgage for the remainder. The bad news is that both come with high interest rates. If you have anything to put down — even 3% — you'll save yourself a bundle. That's because Fannie Mae has standardized the lending criteria for 97% financing and will now buy these loans, which means that practically every mortgage lender can offer them.
Where to shop: In situations that are, shall we say, "odd," you're often best off visiting a mortgage broker. These people act as agents, directing you to a lender and then collecting a fee or a percentage of your loan amount. The fee is the key: They don't get paid unless you get a loan. It's critical, though, to choose only a broker that comes highly recommended — and the recommendation should come from a friend or colleague who has actually used the broker, not from your real estate broker or builder. Clients who use mortgage brokers complain, for example, that brokers say they're canvassing a dozen or more sources when they've really only checked with two or three. Other grievances: Brokers tend to throw business to the lenders who are their friends, and they can slow the mortgage process, making you wait for details about the terrific rate they've gotten you until it's too near closing to shop anywhere else.
The Credit Delinquent
You've got a couple of 30-day late payments on your Visa card, and once you forgot to pay the phone bill. Will you be able to get a loan? Are you supposed to pay for your mistakes forever?
What you want: Tampa mortgage broker Chris Munzo says he used to have just one lending source for poor credit risks. But now that the market is infinitely more competitive, "I have six or seven lenders aggressively soliciting my [poor] credit business," he says.
One reason: Lenders have finally figured out that most people with 20% to 30% equity in a home aren't going to walk away from it, even if their credit is bad. The other reason: Many lenders now have their own credit scoring systems that help them figure out how much of a risk a person actually poses — and so can price their loans accordingly.
Where to shop: All lenders are more willing to write loans for bad credit risks these days, but your best bet may be a mortgage broker. "They used to call it 'hard money,' and mortgage brokers are where you had to go to get it," says North Carolina broker Christopher Cruise. "Today, you're generally still best off going to mortgage brokers for B, C and D credit."
