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Shopping for a mortgage

In the old days, you would probably get your mortgage from the neighborhood bank where you had your savings and checking accounts. Today, there's usually little reason to be restricted to this one lender. You can shop around for the best terms, such as the lowest interest rates, few if any points and low closing costs.

Strategy: Consider shopping for a mortgage before you find the home you want. By prequalifying for a loan, you may be in a better position to negotiate the purchase price of a home-an edge that may be particularly useful in a tight real estate market.

To shop for a mortgage online:

• Interest.com (www.interest.com)

• Lending Tree (www.lendingtree.com)

• MortgageExpo.com (www.mortgageexpo.com)

When to Refinance

If you have a high interest rate mortgage and the rates have come down, or if you have an adjustable rate mortgage and you want to lock into a fixed-rate loan, you may want to refinance your mortgage. This means obtaining a new loan to pay off the old one.

Should you refinance?

Some experts suggest that when there's an interest rate differential of at least two percentage points-for example, your loan is 8% and the current rate is 6%-it may pay to refinance. But a drop in the interest rates may not be enough to justify refinancing. Usually expect to recover your refinancing costs within about 18 months. Also anticipate remaining in your home for some time to come. For example, if you plan to sell in three years when your children go to college, it probably doesn't make sense to refinance.

Costs of refinancing can include:

• Points, which are up-front interest charges.

• Bank attorney's fees (typically several hundred dollars).

• Title and mortgage insurance updates.

• Mortgage recording taxes.

• Escrow costs for property taxes and homeowner's insurance. If you refinance with a new lender, you probably have to put a certain amount into the lender's escrow account to cover your property taxes and homeowner's insurance. But this isn't lost money; it's used for your benefit. And you'll recoup your escrow balance from your old mortgage.

Strategy: To save expenses, refinance with your existing lender. The lender may waive certain costs. But if the lender has sold your mortgage, then refinancing with the lender is like starting from scratch and can entail the same costs as using a new lender.

Tax treatment of points on refinancing

Individuals who have high interest mortgages may want to refinance for a lower rate. As I explained earlier, the lender may charge "points," a type of up-front interest charge, to bring down the rate on the mortgage-the greater the points, the lower the interest rate. One point equals one percent of the mortgage amount.

Points on refinancing are deductible, but the question is when you can claim the deduction. Points incurred to refinance the outstanding balance of an old mortgage are not immediately deductible. Points paid on acquisition indebtedness are deductible immediately. Instead, they must be amortized (deducted in equal amounts) over the term of the new mortgage.

Strategy: If you are refinancing a mortgage that you've already refinanced so that you have been amortizing the points on the refinance, don't forget to deduct your remaining points in the year of your second refinancing. For example, if in 2003 you refinanced your original mortgage and paid $1,200 in points on a 30-year mortgage, you can deduct $1,180 if you refinance again in 2005 (you only deducted $40 in 2003 and in 2004).

Cutting your property taxes

If your home is overvalued or there's an error in the tax records, you may be paying more in property taxes than you should. According to the International Association of Assessing Officers, more than 50% of homeowners who challenge assessments get them reduced. But you must act to get a reduction; your city or town won't volunteer to check that your assessment is correct.

Check your current assessment

At your town or county assessor's office, check on the description of your property-its size, the description of your home and whether any personal property is included in the home's assessment.

Review comps in your area

The assessment of your home is based on its value, which, in turn, is based on a comparison with other homes in your neighborhood. Compare the assessment of your home with the assessments of homes you believe have similar value. Find similar homes by checking recent home sales in your area.

Obtain an appraisal of your home

If you think the town has overstated the value of your home, get your own appraisal. Use only an appraiser with the right credentials. Cost: Between $400 and $500.

List special factors affecting value: Your home's location may affect its value. If you are on a busy street with heavy traffic, the value would be less than if you were on a quiet cul-de-sac. Location near a highway is another negative factor. Look for changes that may have occurred since your home was last assessed (for example, a newly constructed mall or highway near your home).

Strategy: Take advantage of special exemptions that entitle you to property tax reductions. Your local tax assessor's office can provide you with a list of exemptions. Exemptions may be available for senior citizens, veterans and the legally blind or disabled persons. States may create limited exemptions for owner-occupied homes (for example, New York's STAR program). See if your home qualifies for exemptions for historic properties or rehabilitated properties.

File for an assessment reduction

Each year, localities conduct hearings for assessment challenges. Gather all your information and present your case. Make sure you find out the rules, such as what you'll need to present and when you must appear. Failure to follow these rules can mean waiting another year for a contest.