Drama-Free RE: Top 10 Ways to Finance a Home Without All the Drama

By Tara-Nicholle Nelson, FrontDoor.com | Published: 4/14/2009

Reduce your mortgage anxiety by taking some time to learn about the major features of your home loan.

Mortgage -- what used to be such a dry, even boring financial topic is now riddled with emotional landmines and drama potential.

Maybe, like lots of Americans, your home equity is upside down and you can't refinance? Or you suspect your mortgage broker might be a con-artist? Perhaps your loan qualifications are great, but your spouse's credit is, well, not so attractive.

Whether you're trying to get a loan to buy a home or simply trying to keep the home you have, FrontDoor Insider Tara-Nicholle Nelson will help you defuse the potentially explosive drama of home financing with 10 surefire strategies.

#10. Know the ins and outs of your mortgage.

Eliminating mortgage anxiety from your life doesn't require a Ph.D. in finance. The road to no more drama starts with taking a few steps to understanding the major features of your home loan. Most of us can remember a time, during escrow, when the details of our loan were our life's primary obsession. A few years later, though, those days and that data are foggy memories. Don't get caught by a surprise loan adjustment or miss out on potential refi savings because you don't know what your loan is all about. Dig out those loan docs or give your lender a ring, and get in the know about every mortgage you have on your home.

Who's who and what's what. Every homeowner should know which bank or mortgage servicer is handling their loan at all times, and whether their loan is government-insured. This is especially key if you think you might need a loan modification to get your payments back on track, as your lender is the first place you'll need to call. But before you do, you'll want to know if your loan is an FHA, Fannie Mae, Freddie Mac or VA backed loan -- something you'll find in your loan documents. If so, your lender is required to make more loan mod options available to help you out if you get in a bind.

Your loan type -- fixed or adjustable -- is potentially the most essential piece of information you need to know about your mortgage. You should be able to tell that from your mortgage payment coupons. The idea is to know what you need to be planning for. Can you count on having the same payment forever or do you need to anticipate adjustments?

Ch-ch-ch-ch-changes. If you have an adjustable rate mortgage, or ARM, you've got lots more investigating to do. You need all the details of the planned adjustment, things like:

• Is your loan an amortizing ARM, an interest-only ARM or a negatively amortizing, or Option ARM?
• When is it set to adjust, and how often will it adjust thereafter?
• What index does your loan adjust based on, and what sort of payment increase is projected, roughly, based on today's rate for that index?
• If you currently have an Option ARM, how much interest are you adding to your balance every month when you make the minimum payment?
• ARMs all have a cap for how much the payment and interest can ever go up -- what's your loan's adjustment cap?

Analyze whether you'll be penalized. Though less common these days (fortunately), prepayment penalties must be factored into your mortgage planning, especially if you're considering selling or you have an ARM you plan to 'fix' sometime soon. Check out when your prepayment penalty will expire, how the penalty is calculated and whether it's hard (kicks in whether you sell or refinance) or soft (only incurred if you refinance).

If you get your mortgage payment and original loan documents in one place, you should find the answers to every question here. If push comes to shove and you can't find -- or can't decipher! -- your loan paperwork, ask your mortgage broker to sit down and help you figure things out. It's a great segue to getting advice about whether it's time for you to make any mortgage moves.

NEXT: #9: Foreclosure-proof your home, before you even buy it >>

GO TO: Drama-Free Home Finance Main Page