Someone told you to only get a fixed mortgage – and at least a 15-year fix at that! I think that’s bad advice. We’re near the top of a tightening cycle, so fixing now means you’ll probably pay a higher rate than the average variable over the life of the loan. Interest rates aren’t like they used to be. I simply can’t foresee any circumstances that will push the base rate higher than 7% – barring an economic catastrophe – and most likely there’s going to be a series of cuts sometime in the next few years.

In general, if your credit history is good and your income is high enough to make the payments, you should be able to get a mortgage. The current downturn make force you into a higher interest rate than last year, but it shouldn’t be much worse than that. In a few years, if rates go down, you can always refinance at that point.

Some advice:

1: Always go to a bank, not a mortgage company. And preferably a bank with a good reputation. My parents got a loan from a mortgage company at one point and it was a disaster. The mortgage was sold from company-to-company every six months, making a total mess with payment processing, escrow processing, taxes, etc. The confusion created some colossal screwups (like using our escrow to pay someone else’s property tax.) When I bought my house, I got the mortgage from Chase Manhattan and there has never been a problem.

2: Fixed-rate mortgages only. Never use an ARM unless you plan on dumping the house in a year or two. The rates will always end up adjusting to something unbearably painful – which is part of the reason for the current crisis. I would recommend a 30-year fixed-rate mortgage. Some people will recommend 15-year, if you can afford it, but I don’t.

3: If you can scrounge together enough money for a 20% down payment, that’s best. Banks will love you if you can do that. If you can’t put down 20%, you’ll probably be required to buy Private Mortgage Insurance (PMI) to cover the bank’s loss if you default and they can’t sell the house for the amount outstanding on the loan.

4: In some cases, if your credit is especially good, the banks might be willing to get creative to avoid PMI. When I got my house, they arranged an 80-10-10 deal, where I got a mortgage for 80%, a simultaneous home equity loan for 10%, and a 10% down payment. The equity-loan portion had a much higher interest rate (8-3/8% vs 6-3/8% on the first mortgage), but I was able to pay it off in four years, rather than over it’s 15-year schedule, so the overall impact wasn’t that bad.

5: When shopping for a house, it is always a good idea to get a pre-approved loan. Pre-approval (not pre-qualified!) means the bank goes through all their financial analysis and doesn’t just take a quick look at your credit record. If you go to a seller with a pre-approval, it is equivalent to a cash-sale, since they don’t have to worry about your ability to get a loan. This gives you a huge advantage over other buyers. (I did this when I bought my house, and beat out three other people who offered more money but were not pre-approved.)

When I first started, I rounding up my payment to an even $100 figure (when I couldn’t afford much more than the exact payment). That reduced the time by a much larger amount than it seemed.

A couple of other thoughts for you. If your new employer happens to have a credit union, or relations with one, join it.

CU’s are really good about mortgages to members, and if you’ve been a member for 6 months or so, they’ll know you as a financially stable person. CU’s also don’t always sell their mortgages on the secondary market, which, while of little real consequence to the home owner, just feels nice.

When you do finally get the mortgage, if your finanical state permits, consider a 15 year conventional, paid bi-weekly (assuming your employer pays you bi-weekly, this is really easy to deal with). That results in the note being paid off in roughly 12 years, which (if I’ve read you correctly) should be just before the point where you’ll be eligible for retirement. Nice to have the house all paid for when you become eligible for social security/medicare/medicaid, even if you do keep working (I expect to, as long as I stay healthy).

Matt, $417k is way out of my budget, so I fall within the magic number.

David, thanks. I’ll go check out that blog.

And they even have a relevant rock song of the week, every Saturday!

Robert

But when it comes to mortgages the magic number is 416,999. As long as you are under $417,000 you will fall into a more favorable group of loans, conforming vs. jumbo loans. Conforming loans are bundled by Fannie Mae and Freddie Mac and sold as securities — this means that they are much easier to get money for from the lender’s end and usually have a slightly lower interest rate because of that.

All in all the comment about how lenders make money is correct and the competition should keep rates down, especially as borrowers get scarcer due to those who got hurt most by the sub-prime mess leaving the mortgage market. I am not an expert on these things but I wouldn’t panic just yet — the Fed just pumped a lot of liquid money back into the market so las long as you have good credit you should be ok.