Mortgages: 7 things you need to know in 2009

With all the doom and gloom over housing, you might be surprised to know that this is a fantastic time to get a mortgage. Not if you have poor credit, to be sure. But you can get a great deal on a 30-year, fixed-rate, conforming loan these days if you have a solid FICO score, a manageable debt burden, and proof positive of a reliable income.

You have to go back to around 1961 to find a time when 30-year mortgages had rates this low, according to Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, N.J. For that, thank the US government, which is trying to jump-start the stalled housing market by buying up mortgage-backed securities.

On Dec. 31, Freddie Mac reported that average rates on 30-year fixed mortgages dropped to 5.1 per cent for the week, down about 1.3 percentage points since late October and the lowest since its survey began in 1971.

Rates are probably headed even lower in 2009, raising the question of whether you should borrow now or wait for a better deal. The experts are sharply divided over this one. Put it this way: If you're a gambler, wait. If you can't sleep at night worrying that rates will go up from here, borrow now.

Here are some key things you need to know about today's mortgage market:

Now more than ever, shop around

In ordinary times, one loan is about as good as another because most lenders' offers on 30-year loans are clustered within around a quarter of a percentage point. Not now. With the economy so shaky, lenders are all over the map in how much risk they're willing to take in making loans.

So it really pays to shop around. And keep checking, because rates are constantly changing. One day in late December 2008, Wells Fargo was offering 30-year conforming loans at 5.0 per cent plus one point, while Bank of America was offering the same kind of loan at 6.625 per cent plus one point, according to Cameron Findlay, chief economist of LendingTree.com. No offense to Bank of America, but only a sucker would have borrowed from it instead of Wells Fargo that day.

For new loans, get a fixed rate

Forget what you were told in quieter times about the pros and cons of fixed- vs. adjustable-rate mortgage loans. These days, all the best deals are on fixed-rate loans because that's the segment of the market that the government has been targeting with support. The securitization of adjustable-rate loans has mostly dried up, so banks don't want to originate ARMs, therefore they don't offer attractive rates on them, says HSH's Gumbinger.

If you have an ARM, keep it or now

On the other hand, if you got an ARM in the past and it's coming up on an interest rate reset, don't rush to unload it. Short-term interest rates have gotten so low that you're very likely to see your monthly payment fall. Thank your lucky stars if your ARM happens to be indexed to the one-year Treasury bill, whose yield has fallen below half a per cent.

Even with the typical spread added on, you're still paying only around 3.25 per cent a year, says Gumbinger. ARMs indexed to LIBOR (the London Interbank Offered Rate) are resetting these days to the low 4s, which is still excellent.

Check your finances

The hurdles to get one of those low fixed-rate loans are high because Fannie Mae and Freddie Mac have tightened standards for the loans they'll buy or guarantee, even though the two mortgage finance giants are now under government conservatorship.

You'll need a FICO score of at least 720 for the best interest rate, although for a big enough fee Fannie and Freddie will guarantee loans with FICO scores down to the mid-600s. You may also need a down payment of 20 per cent. In the boom times you could get a "piggyback" loan to shrink your down payment, but those are history. Even private mortgage insurance, which used to cover some of the financing gap up to 20 per cent, is much harder to get now because the issuers have suffered big losses.

Lately, says LendingTree's Findlay, the highest hurdle for many buyers has been lenders' debt-to-income standards. Here are the numbers, as of late December, according to LendingTree: For a Fannie or Freddie conforming loan, monthly mortgage payments cannot exceed 28 per cent of gross income, while all debt payments (including student loans, etc.) cannot exceed 36 per cent of gross income.

For a Federal Housing Administration-guaranteed loan, the corresponding figures are 29 per cent for mortgage debt and 41 per cent for all debt.

Before making an offer, get pre-qualified

Home sellers are likely to give you a better deal on a house if you're pre-qualified for a mortgage. Why? Because it shows you can get the deal done quickly. In this market, nothing burns a seller more than being strung along by a buyer who wants the house but can't qualify for a loan to buy it.

First-time borrowers: Get credit counseling

A lot of the mess we're in now could have been avoided if first-time home buyers had paid attention to warnings about getting overextended. If you don't want to listen to your parents or nosy brother-in-law, then visit a credit counseling agency. Says Rick Sharga, marketing vice-president at RealtyTrac: "Most people getting into the market for the first time seriously underestimate the cost of maintaining a home, from taxes to upkeep. What happens if that water heater blows? Do you have enough money to pay for it without missing a mortgage payment?"

Think hard about refinancing now

The decision about when to refinance comes down to personal risk preferences. Of course, you should also run your numbers through one of the many online calculators (a rough rule of thumb is that it makes sense to refinance if the new rate is a full percentage point below your current rate and you don't plan to move soon).

The argument to wait, as expressed by BanxQuote.com President Norbert Mehl, is that the Federal Reserve and Treasury Dept. are determined to force mortgage rates lower in 2009 and are bound to have their way. Says Mehl: "The pressure on the banks will continue to mount to bring down interest rates, not just on mortgages but on all kinds of personal loans."

In contrast, LendingTree.com's Findlay says that while it's reasonable to guess that rates will fall more, nothing's for sure. "Rates have come down so fast that trying to pick the bottom is a mistake," he says. "Their propensity to slingshot back up is high." He votes for refinancing now if the numbers work.

So, pull the trigger or wait? Nobody but you can decide this one.