Interest Rates & Mortgage Options

Once you’ve been pre-approved for a loan and found a house you want to buy the next step is determining the type of mortgage to use and when to lock in your interest rates. Due to the real estate decline and sub-prime mortgage meltdown, lenders and brokers are more careful with how they lend, what they lend, and who they lend to. You’ll need to consider the following when choosing a mortgage:

Interest Rates

About two months ago, the rates were at an all-time low. You could get an interest rate for less than 5%, which is crazy, but it happened. Now, you’ll see interest rates somewhere between 5.5% and 6%, which is nothing to cry about. This is purely my opinion, but I would lock in the rate as soon as possible, because with inflation rearing its head in the future and energy prices going back up, the interest rates will most likely continue to rise.

Points and Origination Fees

A mortgage point is equivalent to 1% of the loan amount, so if the price is $200,000, a mortgage point is $2,000. You can buy one of these points to buy down your interest rate, typically .25% for every point. A point is basically pre-paid interest. You pay mortgage interest up front. I wouldn’t suggest doing this, because the interest rates are so low right now.

An origination fee is usually charged by brokers, and it is a processing fee. Again, I wouldn’t deal with a broker that charges an origination fee. But be aware that if you don’t pay points or origination fees, many brokers will offer you an interest rate above prime, typically .25% above the prime interest rates.

Which Mortgage Is Right For You?

Stay away from interest only and adjustable rate mortgages. Ask anyone currently going through foreclosure if an adjustable rate is a good idea. People were buying houses with teaser rates of 1 or 2 years, then their rates were jumping up drastically, and the monthly payments were more than homeowners could afford. An interest only loan will never pay down the principal, so why own a home if your not going to gain any equity?

With rates as low as they are, I think fixed rate mortgages are your best option. A 15, 20, or 30 year fixed mortgage is the best way to go. If you know that your income will increase in the near future, consider getting a 30 year mortgage, because you can always pay a 30 year mortgage like a 15 year mortgage in the future. It will amortize the same. Don’t spend the extra money to refinance into a 15 year mortgage.

Next, we’ll get deeper into the down payment, private mortgage insurance, and second mortgages.

Erik Folgate is a personal finance writer and social media consultant.

Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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