A Guide to Mortgage Shopping

How Much Money to Put Down?

These days some lenders will give you a mortgage without any down payment at all. But if you can put 20 percent down, that's still ideal. That's the threshold for avoiding private mortgage insurance, or PMI. PMI isn't anything that benefits you. It's something lenders demand in order to protect themselves in case you stop paying back your loan. In addition to putting down 20 percent, there are other innovative ways to structure a first and second mortgage and avoid PMI. Ask a professional.

If you do end up paying PMI, you get to stop as soon as you have 20 to 22 percent equity in your home. The Homeowners' Protection Act of 1998 says that lenders must terminate your PMI when you reach 22 percent, based on the original property value. Keep track of that. Some lenders and insurance companies fail to tell you when your PMI obligation is over, because they want to continue collecting the pricey premiums. If yours is a "high risk" loan because you have poor credit or if you have made late payments on your mortgage, your lender has a right to keep charging for PMI.

If you can pay off your mortgage in less than the 15, 20 or 30 years planned, you will save thousands of dollars in interest. Just make sure there is no penalty for early repayment. In some states, prepayment penalties are illegal, in others they're quite common. There are a couple different ways to set up your own early repayment system.

One way is to simply send extra money each month when you pay your mortgage. Most mortgage companies provide a blank line for you to write-in the extra amount you are sending. Just be sure to note that your extra money is to go toward principal. Paying extra toward your principal reduces how much interest you owe in the long run. This method is flexible, so if you're pinched for cash one month, you can send less. If you're flush another month, send more.

If you need a more structured approach, consider this: Most of us pay our mortgage bills once a month. But most of us get paid every two weeks. If you set aside half your mortgage money every pay period, you will end up with an extra month's payment by the end of the year. Send that money in, say it's for principal, and you'll be way ahead on your mortgage.

Because prepaying is such a great benefit, some companies are trying to cash in. These companies offer "mortgage savings plans" for a price. The company collects your extra money every two weeks and sets it aside for you. This method certainly provides a dose of discipline, but it comes at a price. Mortgage savings plans typically cost about $500 to set up and $2.50 for each withdrawal. If you experience hard times, you still have to pay, and if you don't, you could face late fees. To make matters worse, the company holding your mortgage money makes interest on it. Wouldn't you rather earn that interest yourself?

To be a Savvy Consumer …

Do your homework:

If you're a first-time homebuyer, get a hold of every book and pamphlet you can about mortgages. Also consider taking a home buying class. Fannie Mae and Freddie Mac offer first-time homebuyer classes. If you complete the class, you prequalify for a loan.

Shop for mortgages yourself, if you feel confident and comfortable doing so.

Figure out who's who in your area. Let's see, is this company a mortgage lender or a mortgage broker?

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