Mortgage myths and strategies
By Dan Hanson Special to The Acorn

A home is typically the largest financial asset in an individual’s life. Yet effectively managing and capitalizing on this significant investment is often marred by common misconceptions that may leave homebuyers and homeowners alike feeling confused, hesitant and intimidated. To ease the confusion, here are a few tips that can help borrowers manage their home loans as they do other financial assets.

Myth No. 1: It’s always best to stick with the same mortgage until the loan term ends.

Although we value “sticktoitiveness,” it’s not always the best approach when it comes to a home loan. Whether refinancing to a lower interest rate, or moving from an adjustable rate mortgage to a fixed rate loan, change can be good in many situations. Realizing that change is often beneficial can alleviate some of the pressure in obtaining a loan. What makes sense initially may not continue to be the best choice as your circumstances change over the years.

Myth No. 2: The stability of a 30-year fixed loan is the right choice for any borrower.

“One size fits all” doesn’t even work for jeans, so it certainly shouldn’t apply when choosing a mortgage. Decades ago, it was not uncommon for loan choices to come down to two scenarios: either you fit a size 30-year fixed rate loan, or you didn’t get a loan at all.

Myth No. 3: Adjustable rate mortgages are too risky because the monthly payments can become out of control.

While it’s true that the interest rate can increase on an Adjustable Rate Mortgage and cause monthly payments to go up, it’s equally true that the interest rate has the potential to decrease to lower monthly payments. Most ARM programs have “caps,” which put a ceiling on how high the interest rate may climb when the loan “adjusts.” There are also lifetime caps on the maximum the interest rate may increase during the loan’s full term.

Alternatively, a fixed period ARM—also known as a hybrid ARM—blends the benefits of an ARM’s generally lower initial interest rate with the security of a fixed payment for a period of time (three, five, seven or 10 years). After the fixed rate period expires, the interest rate typically adjusts annually for the remainder of the loan.

Myth No. 4: Paying a mortgage can drain your funds for other investments.

Actually, in the appropriate circumstances, some borrowers obtain an ARM or an interest-only home loan in order to minimize their monthly mortgage payment and free up funds to put towards other financial interests. For example, interestonly programs allow homeowners to make payments (generally for the first 10 years) towards only the interest assessed on the loan balance each month. And in appropriate situations, these homeowners can then apply the “extra” funds—which otherwise would be used to pay down the principal loan balance—towards potentially higher-yield investments.

Mortgage management

Like stocks, bonds, retirement accounts and other financial assets, a mortgage may be managed to produce the best financial results. Here are a few key considerations for effectively managing your mortgage.

Determine how long you plan to stay in the home, then choose a mortgage that makes the most sense for your planned stay. For example, if you purchase a starter home with plans to sell in a few years to buy a larger home, a loan with low initial payments for a fixed period of time may meet your needs better than a 30-year fixed rate loan with stable, but higher monthly payments.

Rank the risk

For an ARM, assess your comfort level with the potential of an interest rate increase and your ability to absorb possibly higher monthly payments.

Consider your stage in life when making decisions about your mortgage. Loan options exist that can help you whether you are planning for a baby or anticipating retirement, and most situations in between.

Be sure to ask your lender about rate caps on any adjustable rate mortgage you consider. Understand how much the rate can increase periodically and how much it can increase over the entire loan term.

Dan Hanson is a managing director for Countrywide Home Loans, Inc.