Find lender, then look at homes; Limits: Homebuyers need to know what they can afford before house hunting.; DOLLARS & SENSE


Which comes first: finding the house or finding the mortgage?

Both can be daunting, especially when you are engaging in one of the most active real estate markets in a generation. But if you listen to the experts, before getting emotionally wrapped up in finding the home of your dreams, finding the mortgage and how much you can afford makes the most sense.

"The worst time to go shopping for a mortgage is after you've signed the contract to buy the home," said Keith Gumbinger, vice president of HSH Associates Inc., a New Jersey company that tracks and analyzes mortgage rates nationwide.

"Standard contract language leaves you about 10 days to go secure a mortgage application. If you have never bought a home before and haven't looked at mortgages before, it is very easy to become overwhelmed in those 10 days."

In today's mortgage marketplace there is so much information, so many lenders and so many programs from traditional fixed-rate mortgages -- 15- , 30- , even 40-year terms -- to adjustables to government-insured loans, that a consumer needs to become educated.

"Everyone is so different and there are so many programs available, that they [buyers] need to be honest with who they are working with," said Neil Sweren, president of American Home Loan Inc. and former president of the Maryland Mortgage Brokers Association. "If they are working with a good mortgage broker, the mortgage broker will help them pick a program that is best for them."

Both real estate agents and lenders recommend that buyers get pre-qualified before hitting the "open house" trail. Buyers should find out how much house they can afford. The ability to submit a prequalification letter from a lender with a sales contract makes the consumer a stronger buyer in the eyes of the seller.

"If you have not done your homework in advance [checking your credit report, finding a lender] and haven't left yourself some time to call around, you are not going to be able to tell a good deal from a bad deal from an average deal," Gumbinger added.

Essentially, what most mortgage experts agree on is that consumers need to focus, determine and understand their situation.

"I ask a series of questions," said Tom Champion, manager of the Lutherville office of Norwest Mortgage Inc. "When they call me, they [usually] want a 30-year, fixed-rate [mortgage] because that is all they have ever heard; that is what their parents had and that is what their parents are recommending.

"I ask, 'How long do they expect to be in the home?' History tells us that it is five to seven years.

"I ask them the importance of gaining equity in the property vs. the payment stub. I ask them their comfort level with using some type of adjustable-rate mortgage. And I ask them about the payment shock of having a new mortgage. Have they explored with some type of accountant or financial specialist the tax ramifications of buying a house. All of those lead you down a path," Champion added.

He recalled meeting with a buyer who had been transferred to Baltimore and who wanted a 30-year, fixed-rate mortgage.

Champion asked the buyer how many times his employer had transferred him in the past. The answer was about every two or three years. Instead of a 30-year term with a higher interest rate, Champion suggested an adjustable-rate mortgage that would carry a lower rate. "I start making them think about other products themselves," he said.

With fixed-rate mortgages rising about 1.5 percent in the past 12 months, hovering around 8 percent, adjustable-rate mortgages have had a resurgence.

There are a number of adjustable products in the marketplace, offering varying degrees of safety vs. monthly savings. The best known is the one-year ARM, which comes with the lowest interest rate, but can adjust annually to a new rate.

In the first year of a one-year ARM, a buyer can save hundreds of dollars, compared with signing up for a traditional 30-year, fixed-rate loan.

For example, a $150,000 mortgage at 8 percent for 30 years will run the buyer $1,100 a month in principal and interest. A one-year ARM with an initial rate of 6 percent, however, will be $900 a month. That's a savings of $2,400 for the first 12 months.

Then there are "hybrid" ARMs, products that carry a slightly higher initial interest rate that is set for the first three, five, seven or 10 years, depending on what the buyer feels is the most comfortable. The longer the initial term, the higher the interest rate.

After the initial term, the mortgage begins to adjust annually. But, depending on what is happening in the mortgage market, a buyer usually refinances into a fixed-rate product instead of leaving themselves open to volatility.

There are also Federal Housing Administration (FHA) and Veterans Affairs government-insured loans that offer more liberal qualifying terms (down payment and debt-to-income ratios) than conventional loans to potential applicants.

Ultimately, the two questions that most mortgage officers hear most often from applicants are: "Are rates going to up or down?" and "Should I lock in?"

"My answer to that is: 'My crystal ball is in the shop today,' " Sweren said. "There isn't any lender that knows what is going to happen to rates."

Champion and Sweren agree that if a borrower is comfortable with a given payment, lock in a rate and "sleep easy at night."

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