Re-Evaluate Your Mortgage As You Do A Portfolio

By HOLDEN LEWIS
bankrate.com

It's a good idea to evaluate your mortgage periodically to figure out whether it still fits your circumstances.

Do you have a 30-year fixed rate mortgage, but plan to move within five years? Maybe you should get an adjustable-rate loan. Do you or your spouse plan to take unpaid parental leave in the next few months? Maybe you should think about changing that adjustable-rate loan to a fixed.

Bob Walters, senior vice president of Quicken Loans, recommends making a New Year's resolution to re-evaluate one's mortgage annually. He draws an analogy to investing for retirement.

"Just like different types of (investment) funds are appropriate in different times of your life, based on age and income and risk levels and goals, the same is true for mortgages," Walters says. "You have to use the same concept of what they call in investing 'rebalancing.' You have to take an annual look and ask, 'Do I have the right kind of mortgage for myself?' "

That's a question only you can answer. Two homeowners in identical situations, but differing temperaments, might feel comfortable with radically dissimilar mortgages. Mortgage lenders might offer different advice, too _ some belong to the risk-taking camp that advocates adjustable-rate mortgages, or ARMs, and others counsel clients to take fixed-rate mortgages because it's better to be safe than sorry.

Homeowners periodically should consider their loan options "even if just to ponder it," Walters says. "They can always crawl into their shell and pick the fixed rate. But they should think about it first."

And they shouldn't think about it only when they buy the house or refinance the loan to get a lower rate. Homeowners should consider their loan options whenever their circumstances change, Walters says. He offers a hypothetical example of a risk-averse homeowner who gets a 30-year fixed loan. Later, her boss tells her that she's on the fast track for a promotion, which will entail relocating within three years. That homeowner should refinance to a 3/1 ARM and reduce her interest rate by at least a percentage point, Walters says.

On the other hand, a married couple with a 3/1 ARM and a child on the way might want to switch to a fixed-rate mortgage if one of the parents plans to quit or take an extended leave from work. The monthly payment will be higher with the fixed-rate loan, but it will stay the same if interest rates rise a few years down the road.

Chris Larsen, CEO of E-Loan, agrees that homeowners should re-evaluate their mortgages, but not just annually. "I might go a step further," he says. "You might want to evaluate your overall debt portfolio every month."

Many people are accustomed to evaluating their mutual funds every month, Larsen says. One's debts _ house, car, credit cards, student loans _ are a mirror image of one's assets. Larsen suggests taking a holistic view of assets and debts, and keeping track of your credit score. With this knowledge, you can pounce on opportunities to save money by moving to lower-rate debt.

Where Walters has a risk-taking attitude, and Larsen advises constant watchfulness, loan officer Robin Silverberg of IPI Skyscraper Mortgage on Long Island in New York has a more cautious, laid-back outlook. She believes that if you don't know how long you will live in your home, it's probably better to get a fixed-rate loan. As befits someone with a degree in counseling, Silverberg listens closely to borrowers to figure out what kind of loan they need, even if that's not the loan they're asking for.

Silverberg wants to know whether a homebuyer plans to stay in the house for more than five to seven years. She suggests ARMs to people who are sure they will move to another house within a few years. She often suggests ARMs to newlyweds buying their first co-op, because they probably will move.

But when clients buy single-family houses and don't know how long they will stay there, she usually steers them toward 30-year, fixed-rate loans. Such a borrower might stay in the house longer than expected.

(Distributed by Scripps Howard News Service. E-mail Holden Lewis at hlewis@bankrate.com)