MORTGAGE

I have decided that the phrase “shopping mortgage rates” is an oxymoron. There is no such thing. A mortgage rate is a mortgage rate is a mortgage rate. What you are actually shopping is truth. I will skip the dishonest mortgage broker rant here and cut to the chase.

How to Buy a Mortgage

NOTE: Carve out some time to call all of these brokers on the same day.
Steps:
1. Ask friend near your home or office if they know a decent mortgage broker. Get 3 names.
2. Call broker.
3. Be pleasant and professional. These are generally nice hardworking people and deserve respect.
4. Tell him/her the amount of the mortgage, downpayment if purchase, estimated value of home and term you want (1, 3, 5, 7, 10, 15, 20, 30, 40 years) . Be prepared to give him/her recent credit scores for the borrower/co-borrower.
5. Once that information has been delivered simply ask “From all of your wholesale sources please tell me the lowest par rate you can lock my loan at today?” Also mention that you want to be fair and let them know you are calling 2 other brokers but you are asking the same question.
(At this point they may feel compelled to ask you what rates you have so far and may attempt to sell against the others - cut them off and tell them you are keeping all rates confidential and will do the same with their rate.)

6. Ask broker if there are any discount points priced into the rate.
If answer is yes then go back to Step 5 and stress PAR RATE.
If answer is no then ask to confirm the wholesaler lender’s name. Write it down and the rate quoted next to the broker’s name.

Step 7. Go back to Step 2 and repeat until you have 3 par rates.

Step 8. When you are done you should have 3 VERY similar rates. Wholesale loan rates reflect a commodity - the time value of money on a certain day. If 2 of the rates are close and 1 is much higher - throw that rate out.

Step 9. Now take the lowest 2 rates and call each back to confirm the rate. Also ask them to email or fax you the rate and the wholesale lender name confirming this is “the lowest par rate you can lock my loan at today”. If they refuse to do this then scratch them from the list.

Step 10. Once you have a winner (lowest rate or person you prefer if rates are same) then call them tell them you would like to buy a mortgage for ___ rate for a term of _____ and there will not be any origination fees or junk fees but you would be willing to pay them a flat fee of $1,500 for their time and expertise. Also promise them you will not further shop the loan and you will not respond to all the phone solicitations you will receive once they run your credit (these phone calls are from unethical loan officers that buy trigger leads from the unethical credit bureaus that sell them - you become a trigger lead when you have your credit pulled by a mortgage broker or bank. (Make sure your loan officer DOES NOT provide your email or phone number when they pull your credit.)

If they agree then you buy the mortgage if not go back to Step 1. They won’t like this method as mortgage brokers love to control the information flow. Some may even tell you this is not legal. Hogwash. Again move on you will eventually find someone honest enough that would rather make $1,500 for performing a service than play games in an attempt to make $4,500.

Good luck and be strong.

Mortgage Tips for a Falling Market

Loans change constantly. The only variable that remains the same is financing, but rates, terms and conditions fluctuate. What was vogue years ago, might not hold true in a slowing marketplace.

Markus Mullarkey, a 31-year-old product manager at CNET, bought his first home nearly two years ago. At the time, he and his fianc� were also planning their wedding and expected to spend a good chunk of their savings on the reception. So coming up with the traditional 20% down payment for their $560,000 dream home � a 1930s craftsman bungalow near Berkeley, Calif. � wasn't a possibility. "There were a lot of expenses right around then, and we knew coming up with a down payment would be a challenge," he says. Mullarkey's mortgage broker found a cost-effective solution for the young couple. By taking out two mortgages � something the industry calls a piggybacked loan � they were able to finance the home with just a 10% down payment. The arrangement also let them avoid paying private mortgage insurance, costly coverage lenders often require for low-down-payment loans. That shaved $100 from their monthly mortgage costs.

The biggest challenge for most first-time home buyers is saving up enough money for a down payment � especially in markets like San Francisco and New York City, where home prices have soared over the last few years. But thanks to a growing assortment of financing options, it's increasingly possible to find mortgages for as much as 97% of a home's value. In other words, you could put down as little as $5,514 for a home that costs $183,800, the national median in 2004, according to the National Association of Realtors.

Sounds great, doesn't it? And for some cash-strapped home buyers, these deals could make financial sense. But they can also be expensive. As Keith Gumbinger of HSH Associates, a mortgage-tracking firm, puts it, "There is no free lunch." For starters, you'll get stuck with a higher interest rate on a loan with a teeny down payment. And because lenders figure the odds are higher that you'll walk away from your loan if you have almost no equity in your home, you'll have to buy private mortgage insurance, which covers the bank if you default. That usually adds a 0.5% to 0.75% premium on top of your interest rate, says Jeff Lubar, a spokesman for the Mortgage Insurance Companies of America. So on a $178,286 loan (or 97% of the median home price) you could end up paying an extra $75 to $110 a month.

But even with these higher costs, there are still plenty of reasons it makes sense to own your own home. Besides the intangible benefits, homeownership lets you build equity, and is the single biggest tax break available to most consumers. For more on deciding whether you are better off renting or buying, click on our calculator.

So what if, after crunching the numbers, you decide it's time to buy your piece of the American Dream? Here's our look at some smart strategies for first-time home buyers.

First: Pay Off Your Debt
It's a common mistake for home-buyers-to-be: They focus on saving as much money as possible for a down payment instead of paying off other debts. A better approach is to use extra cash to eliminate credit-card and other high-interest consumer debt � even if that means you can put down less on your future home, says Lori Vella, senior vice president of national lending for Washington Mutual.

Why? First, credit-card debt is expensive and limits your ability to save. The average interest rate on credit cards now stands at 13.8%, or more than double the 5.33% national average for a 30-year fixed-rate mortgage, according to Bankrate.com. Second, credit-card debt will limit how much you can borrow. That's because lenders won't allow your total monthly debt service � which includes payments for credit cards, student loans and car loans, as well as homeowner's insurance, property taxes and a mortgage � to exceed 40% of your gross income, Vella says.

How Much Can You Afford?
The answer to that is a function of two things: How much you can borrow and how much of a down payment you can muster. As a rule of thumb, your annual mortgage payment, taxes and homeowner's insurance shouldn't exceed 28% of your gross income. Then determine how much cash you have for a down payment, leaving yourself enough left over to pay those pesky closing costs, which can add up to 3% to 5% of your total home's value (plus a little something extra for emergency repairs once you move into your new home).

Still having trouble figuring it all out? Click here for SmartMoney.com's home-buying worksheet.

Types of Loans
Now you're ready to start shopping around for the right loan. As we said, a first-time home buyer with a steady job and good credit can put down as little as 3% these days. These loans are more available, and more reasonably priced, now that they're acceptable to Fannie Mae and Freddie Mac. (The two so-called government-sponsored agencies purchase mortgages worth up to $333,700 on the secondary market � $500,550 in Alaska and Hawaii � absorbing the original lenders' financial risk. And both will now buy 97% mortgages.) While rates vary, such a low-down-payment mortgage will run a half-point higher than a conventional loan, says Steve Majerus, senior vice-president of capital markets for E-Loan, an online lender. On our hypothetical 97% mortgage of $178,286, that extra half-point of interest adds $57 to the monthly payment.

But the more money you can muster for a down payment, the more options you will have. For example, Fannie Mae's new "start-up mortgage" allows borrowers who can put down 5% to qualify for a loan on a smaller salary than with a 3% down payment. You will need to find a Fannie Mae-approved lender to take advantage of this program. Click on Fannie Mae's Web sitefor a list of all of its products and approved lenders.

Private lenders are also coming up with their own programs to tap into the first-time home buyers' market. Washington Mutual, for example, offers a program for buyers with a 10% down payment: Instead of charging for mortgage insurance, the savings-and-loan builds the cost into the interest rate, making it tax-deductible (which mortgage-insurance premiums aren't).

And if you really want to get creative and avoid paying mortgage insurance altogether, you can do as Mullarkey did and take out two piggybacked loans. These are also referred to as 80-10-10s. First, you need to put down 10% of the home's value. Then, you take out a primary loan, usually a 30-year fixed-rate mortgage, for 80% of the home's value. This interest rate should be competitive. For the remaining 10%, you'll need to take out a 15-year fixed-rate mortgage at a far less competitive rate � as much as two points higher than the market. Combine the two monthly costs to come up with your total mortgage payment. Due to the complexity, a piggybacked loan is a bit more expensive than a traditional mortgage and carries higher closing costs. Still, they tend to be cheaper than paying private mortgage insurance.

Questionable Credit
Worried you don't have perfect credit? Thanks to Fannie Mae's "expanded approval" program, consumers with slightly blemished credit can also qualify for mortgages at competitive rates that are as much as two percentage points lower than alternative financing. "These are people who might not qualify for fair-market value rates from traditional lenders," says Liz Bayless, director of single family product development at Fannie Mae.

If your credit's still not good enough for one of Fannie Mae's loans, you may yet qualify for a loan insured by the Federal Housing Authority, or FHA. These government-insured loans are issued with even more lenient credit criteria. You can also put down as little as 3% for an FHA loan, and can wrap your closing costs and fees into the mortgage. Interest rates are typically less than a quarter of a point higher than those in the conventional market. To get a government-insured loan, make sure you find a HUD-approved lender or a mortgage broker who works with one.

There's no income limit to qualify for an FHA-insured loan. However, since these loans are geared toward helping first-time home buyers and low- to moderate-income families, there's a limit to how much you can borrow. The amount varies from region to region, but it's capped at $290,319 in high-cost areas ($403,750 in Hawaii), says Laurie Maggiano, a HUD spokeswoman. To check your area's ceiling, click on the FHA mortgage limits page.

Down-Payment Assistance Programs
Still having trouble coming up with that down payment? Each year HUD gives states and municipalities money to distribute to low- and moderate-income families for housing. Much of it is put toward down-payment assistance programs. Many young prospective home buyers may qualify for a $3,000 to $5,000 grant (or in some cases a loan that's forgiven if a home buyer stays in the home for at least three years) to put toward their down payment or closing costs.

To qualify for a down-payment assistance program, a consumer typically can earn no more than 80% of a region's median income. Call your state housing finance authority, county housing and community development office or mayor's office for an application.

One final note of caution: Don't confuse any of these programs with no-equity loans being offered to people who already own their homes. These high-cost, high-risk home-equity loans are a bad idea. See our story to find out why.

Once you decide on the mortgage you want, do your homework. Different lenders offer different rates, points, and fees. Ask around and compare. Understanding the benefits of different mortgage offerings can be a complex process. How do you figure it all out?

• Evaluate the pros and cons of a fixed-rate mortgage.
• Know all the parts of an adjustable-rate mortgage.
• Learn about balloon/reset mortgages.
• Understand how a reverse mortgage works.