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Special section 7 Bankrate experts with 7 top tips for '07

Mortgages and real estate changed dramatically in '06. Have you learned the lessons well enough to apply them in '07?

 

7 smart mortgage moves for '07

Whether you already have a mortgage or you plan to buy a house in the next year, here are seven mortgage tips for 2007.

7 smart mortgage moves

1. Review your mortgage -- does it still fit your circumstances? Homeowners with mortgages should assess their home loans annually, bankers say. Naturally, you would expect lenders to say that. It's a good idea anyway. Interest rates change, children are born and grow up, sometimes you need to fix up the house and sometimes you need to move on. Life events can trigger changes in the way you pay for your house.

"Every year," says Dan Hanson, who oversees the retail branches for Countrywide Home Loans," say, 'What's going to happen this year?' Do I have a child who, in a year, is going to college? Are we going to have a child, maybe add a bedroom or have to move?'" The answer might make you go mortgage shopping.

For example, let's say you plan to move in a couple of years because your family is going to grow. Consider getting an adjustable-rate mortgage with a low initial rate that lasts three years (a "3/1 hybrid ARM"). That initial rate probably is lower than the rate you're paying now and the same with the monthly payments.

Before refinancing to save money, make sure you won't get zapped with a prepayment penalty, either when you refinance or sell the house. Calculate the cumulative monthly savings to see if they decisively outweigh the closing costs. If not, keep the current loan.

Hanson believes that you should ask yourself periodically: "Is my interest rate higher than the market today? Would it make sense to refinance, to take cash out? Would it be a good idea to get a reverse mortgage?"

And one other question: "How much is my house worth?" Ask a real estate agent who is active in your neighborhood. It's a good way to introduce yourself to the person who might someday help you sell the house. For a quicker, but less-accurate estimate, consult Zillow.com.

2. Watch out for reset. Have you ever seen a cartoon where Bugs Bunny stands at the base of a cliff and he yells at someone standing on the cliff's edge, "Watch that foist step. It's a doozy!" Same thing with a lot of adjustable-rate mortgages: The first step is a doozy -- but up instead of down.

The rate adjustment is called the "reset," and on hybrids such as 3/1 and 5/1 ARMs, the rate can jump as much as 5 percentage points. More realistically, a lot of borrowers face jumps of 3 percent to 3.5 percent in 2007. For interest-only borrowers, that might mean a doubling of the monthly payment.

This is why Hanson suggests reviewing your mortgage annually. Don't get caught by surprise by a rate reset. Refinance the loan if it makes sense to do that.

3. Don't pay the minimum on an option ARM. An option ARM is an adjustable-rate mortgage that lets you decide how much you pay each month. You can make a payment that's big enough to pay off the mortgage in 15 years or in 30 years, or you can pay only the interest, or you can make a minimum payment that doesn't necessarily even cover that month's interest.

 
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