Five Reasons to Get a New Mortgage in the New Year


Mortgage interest rates are near all-time lows and are likely to remain attractive throughout 2012. That means the new year will continue to offer good opportunities for homebuyers who need a new mortgage and homeowners who want to refinance an existing obligation.

With that opportunity in mind, here are five reasons why you might want to get a new mortgage this year, and what you should know about the benefits and hurdles of accomplishing this goal.

Buying a Personal Residence

Economic uncertainty and volatile housing markets have kept so many homebuyers on the sidelines that mortgage purchase applications have dropped to a 15-year low in August, according to the Mortgage Bankers Association.

The lack of applications doesn't mean buying a home is a bad idea. In fact, quite the opposite is true, as depressed house prices and low mortgage rates have made homes more affordable.

The benefits of owning a home include federal income tax deductions and the satisfaction of not paying rent to a landlord, says Justin Lopatin, vice president of residential banking at Baytree National Bank & Trust in Chicago.

"The money you pay on your mortgage may be slightly higher," he says, "but at the end of the year, you get the mortgage interest write-off, so you get money back -- and you get to own your own property."

The slow pipeline of new applications can be blamed on the hurdles that buyers face in qualifying for loans. Chief among the challenges are a down payment and the ability to document at least two years of income, Lopatin says. Income documentation can be hard for people who've suffered temporary unemployment, are self-employed or have irregular wages.

Buying Rental Property

Many investors pay cash to purchase residential rental properties. But some take out a mortgage to increase their leverage, says Julie Miller, sales manager at Prospect Mortgage in Irvine, Calif. The benefit is that the investor who holds cash while financing real property can use the cash to make other investments.

Lopatin says low interest rates are also an inducement for investment property buyers.

"If you can take out an investment loan at 4.5 percent and rent out (the property) and make a few dollars a month, annually, the return will be worth the loan," he says. "Not to mention the tax write-offs and other advantages of owning real estate."

Mortgage insurance isn't an option for investment property, so a fat down payment, typically 20 percent or more, is a must.

Investment buyers also need to show that they have enough income and reserves to afford the payments even if the tenant fails to pay the rent or moves out. Lenders typically will count 75 percent of the rent toward the borrower's income-qualifying ratios, Lopatin says. For example, a monthly rent of $1,000 would count as $750 of income.

Refinancing to Get a Better Rate

Low rates can make rate-and-term refinancing a smart financial move. This type of new loan is exactly what the name implies: a refinance in which the interest rate or term is changed, but the loan amount stays the same.

The chief benefit, Lopatin says, is "reducing your monthly overhead, restructuring your loan to obtain a lower payment."

Another benefit might be locking in a fixed interest rate instead of an adjustable rate that can rise if market rates go up.

Homeowners who want to refinance must provide income documentation and have a "decent" credit score, to use Miller's characterization.

Equity is also required for most, though not all, loan refinance programs. This hurdle can be troublesome because homeowners don't control the market value of their property, Lopatin says.

If your loan amount exceeds the value of your home, consider the Home Affordable Refinance Program, or HARP, which is part of the federal government's Making Home Affordable initiative. If your loan is insured by the Federal Housing Administration, or FHA, the FHA Short Refi program might enable you to refinance in a negative equity position.

Refinancing to Cash Out

A home equity loan or line of credit can be a good way to get cash for a variety of financial needs such as remodeling, major home repairs, paying off other debts or financing a college education.

The benefits, Lopatin says, include immediate cash, low-cost debt and potentially an income tax write-off.

Of course, there's a catch: You can't borrow against your equity if your mortgage debt exceeds your home's value.

"They have to be able to income-qualify for the increased loan amount, and the cash-out limit (means) they have to have a bigger equity cushion than a rate-and-term refinance," she says.

And along with the catch is a caveat: taking out cash isn't free money. In fact, a cash-out refinance increases your debt, which is "just not wise today," says Alfred McIntosh, principal of McIntosh Capital Advisors, a financial planning and investment management firm in Los Angeles.

"Part of the reason we're in this economic situation is that, for a long time, we used our homes as checking accounts," he says. "We need to break the cycle of constantly inflating our mortgages."

Helping a Family Member Buy a Home

Co-signing a loan to help a family member buy a home might sound like a feel-good proposition. But those warm fuzzies are the only benefit that co-signing a loan offers.

From a purely financial point of view, co-signing someone else's debt is a bad bargain.

"I see no reason why anyone should co-sign on anything for anyone, unless it's a relative, because you're putting yourself in a position to jeopardize your credit," Lopatin says. "I don't recommend it, unless there are extenuating circumstances."

Miller also says being a co-signer involves "more negatives than positives" because the co-signer is equally responsible for the loan. If the borrower fails to make the payments, the co-signer is on the hook.