How big a mortgage loan should you have?

The fun part of moving house is surfing real estate agents' Web sites, visiting properties and daydreaming about your new home. But before you get into any of that, it's a good idea to think through the size and type of home loan you should have. And that's not just a question of finding out how much lenders will let you borrow. It's also about seeing how your mortgage fits into your long-term financial strategy.

Mortgage calculators--a first step

Of course, you do need to start by finding out your borrowing parameters. Current mortgage rates mean that creditworthy consumers can get once-in-a-generation deals at the moment. Ron Phipps, who's president of the National Association of Realtors®, described the situation thus in a statement he made on February 10, 2011:

Mortgage interest rates recently hit record lows, median family income has edged up and prices in most areas have been stable following the correction from the housing boom. For people with good credit and long term plans, it's hard to imagine a better opportunity than what we see today.

It's easy to find out how much you can comfortably afford to borrow by using mortgage calculators. However, there are other considerations to take into account.

Down payments--a new issue?

One that could be changing soon is the size of the down payment you may have to find. In February 2011, the Department of the Treasury and the U.S. Department of Housing and Urban Development jointly published a report to congress entitled, "Reforming America's Housing Finance Market." This not only said that it proposed winding down Freddie Mac and Fannie Mae's roles, but also went on: "Going forward, we support gradually increasing required down payments so that any mortgage that Fannie Mae and Freddie Mac guarantee eventually has at least a 10 percent down payment."

If coming up with a bigger down payment would cause you hardship, consider moving now or look into FHA financing.

Home loans and strategic thinking

For most people, buying a home is the biggest single transaction they're likely to carry out in their lives. It's also one that can have the biggest impact on their overall finances. So it's surprising that so many don't consider their mortgages more strategically.

For example, how many people who know that they are likely to move house again within five or seven years of their current purchase consider adjustable rate mortgages (ARMs)? Initially, these loan offer the lowest mortgage rates of all, and people are only put off because they're worried about how much those may rise in the future. But you can choose ARMs with rates fixed for 3 to 10 years, and as long as you move before they rise they can save you a bundle.

Those who are at a point in their lives when they are cash-rich can net very substantial savings by taking out a 15- or 20-year mortgage. It's true that monthly payments are higher, but the overall cost of the loan over its lifetime can be dramatically lower. And it could leave you mortgage-free at a time when that flexibility could help you maximize your retirement fund.

Again, play with some mortgage calculators, get some mortgage quotes and/or speak to some mortgage brokers to see how an ARM or a shorter home loan could impact on your finances. Just don't sleepwalk into your next real estate purchase.