Mortgage options can help or hurt

So you're ready to buy a home. Let's focus on first things first:

Be sure that you have a good overview of your financial health, and don't think of your mortgage separately.

"It should be a part of a larger financial plan," said Doug Duncan, chief economist at the Mortgage Bankers Association. "You should have a household balance sheet and income statement of what things you own, their value, and what things you owe."

Then pull your credit report and "understand what you look like in terms of your past performance in managing credit," he said, because a lender will be looking at the same thing.

"Have an idea of how much you make and where it all goes," Duncan said. "When you know how much you can afford, you can decide how to finance it."

Only then will it be time to mortgage-shop.

Although it's foremost in most buyers' minds, don't obsess on the lower monthly mortgage payments that many creative mortgage products offer.

"If your objective is to live in the home and retire and pay this home off, you can't be lured by the lower monthly payment because the lower your monthly payment, the less you will be reducing the principal on the loan," said Anthony Hsieh, president of www.LendingTree.com, an online lender.

The hottest home-loan product at the moment is an interest-only mortgage, which allows you to get a bigger loan and more house.

Most interest-only payment plans are offered on adjustable-rate mortgages, but they can also be found on fixed-rate loans.

"The name is misleading," said Keith Gumbinger, a vice president at HSH Associates, a mortgage-information publisher. "There is no such thing as an interest-only mortgage because eventually you'll have to pay the loan principal as well."

"Everybody is betting on the future, that we're going to have these big price appreciations in housing, that we're all going to get big raises," said Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co. "What if you don't get promoted? What if you don't get a raise? What if your house doesn't appreciate?"

He and other mortgage experts say interest-only mortgages are best suited for home buyers who plan to move before the principal comes due, for those who expect their incomes to rise strongly over time, and for those who get the bulk of their income in bonuses.

Like interest-only mortgages, so-called option adjustable-rate mortgages are enjoying a surge in popularity. But these, too, require caution, the experts say.

This kind of mortgage gives borrowers the option to pay less than the interest charged on their loans by deferring part of that payment and adding it to the original loan balance.

The lure is a lower payment. On the other hand, if you choose that option, you will end up owing more than your original balance.

"Why would you take a loan product that goes backwards?" Jarrell asks. "That's just insane."

There are also mortgage products that allow you to put nothing down, which also slow your ability to accumulate equity.

In Mark and Jessica Callahan's case, it was the right type of mortgage. The couple, both 25, are negotiating to buy their first home. Their loan is a 30-year fixed-rate mortgage with an 80 percent first lien and a 20 percent second lien.

"We don't have a lot of savings that a lot of people do," says Callahan, an investment-portfolio specialist, who has a master's degree in real estate finance. "I got a second lien because I didn't want to pay PMI (private mortgage insurance)."

Lenders have traditionally required buyers who borrow more than 80 percent of the home's price to pay mortgage insurance to protect against default.

"I got this even with a higher interest rate just to deduct the interest," Callahan says.

In the Callahans' case, putting zero down works for them, says Jarrell, their lender.

"He's a young, upwardly mobile professional with an MBA, who will be making more money and has the financial discipline to save money and to pay off his bills," Jarrell says.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.