Smart Mortgage Planning

Budget

Before you begin the mortgage process, look at your finances. Weigh your income against your expenses and determine if you can even afford a mortgage. Banks use a debt-to-income ratio to qualify applicants. They calculate the monthly mortgage payment along with your gross monthly income. They allow for 28 percent of your income to go toward housing debt --- e.g., mortgage, taxes and insurance. They allow an additional 8 percent --- 36 percent in total --- of your monthly income to go toward all of your monthly debt. This is sufficient for the bank, but you have to take into account living expenses, too. This doesn't include food, phone, cable, car insurance and utilities in the calculation. Make sure that you have enough money to cover everything while leaving yourself a surplus for unforeseen occurrences.

Research the current rates before deciding on a lender. Rates are often comparable, but even a quarter of a percent can make a significant difference. For example, the monthly payment on $200,000 for 30 years at 5 1/4 percent is $1,104.41 per month. Over the life of the loan, you pay $197,585.53 in interest. The payment for $200,000 at 5 percent for 30 years is $1,073.64. Over the life of that loan, you pay $186,513.24 in interest. The $30.77 you save a month may not seem significant, but saving $11,072.29 in total interest makes the extra research worth it.

The mortgage process is all about money --- both for you and the bank. You want to save it; the bank wants to make it. You both meet in the middle. Obtaining a mortgage isn't cheap. Potential fees include application, documentation and rate lock-in. You can also pay a variety of closing costs to the bank, title company, attorney, realtors and municipalities. As with the rate, it's important to do your research and know exactly what a particular bank charges. Don't sacrifice a favorable rate for lower costs, but if rates are comparable, use the fees as a decider.

Part of smart mortgage planning is looking ahead to the future. Be aware of the terms and conditions throughout the process. Look for prepayment penalties. These can be as much as 5 percent of the principal balance if you pay the loan before maturity. If taxes and insurance are included in the payment, be aware that these numbers can fluctuate, modifying your payment from year to year. Most importantly, if your loan is adjustable, be prepared for that rate to go up after the initial period. If it doesn't, you're in luck, but if it does and you're not ready for it, you could be in trouble. Don't assume that you won't be in your house more than a few years. No one can predict the market.