Finding Good Mortgage Rates

This year, my husband and I will be digging in our heels with the idea of fulfilling our home ownership goal. We couldn’t have picked a more opportune time; housing prices have finally come down to more reasonable levels and mortgage rates are quite low, historically in fact. Five years ago during the peak of the market, we thought we wouldn’t be able to afford a home in Southern California for many years, possibly not until we reached our late 40’s or early 50’s. We were fine with that, owning a home wasn’t on our agenda. Paying thousands of dollars a month for a tiny plot of land in a fixer upper just didn’t sound appealing. But, times are a changin’!

The homes in our area are still on tiny plots of land and require a bit of TLC, as many seller descriptions mention. But, the houses are literally two-thirds to half the price they were compared to 2005, and the mortgage rates have remained steady hovering around 5 to 6%. I’m also feeling positive since a few of the homes in our price range, the mid to high $200,000, are pretty cute and may not require as much work as we had originally planned. Here are some of the most recent homes surrounding our neighborhood that on the market, you’ll notice they are small, but quaint:

Based on these home prices, using the Quicken Loan calculator, our monthly mortgage payment would be between $1,291 to $1,785 including taxes and insurance. That’s anywhere between $15 to $509 LESS than our monthly rent! These figures are based on homes ranging from $225K to $285K with only $15,000 down.

Of course there are many unknown variables such as we may not qualify for the lowest finance rate. We also are working on saving up for our down payment, so predicting that $15,000 down may not be very accurate. Another factor that may change is that by the time we are ready to purchase our house, which will most likely be towards the end of the year, the interest rates may rise. Below is a historical chart showing that interest rates on a 30-year fixed mortgage haven’t been this low in the past 10 years.

Obviously, the sooner we can submit offers on homes, the more likely we will be able to lock in a low mortgage rate. Over time, the amount of money that can be saved on finance charges can quickly add up. For instance, below I’ve outlined how much interest will be paid on a home loan of $250,000 at various rates:

• 5% APR: total interest paid over 30 years – $233,139.46
• 6% APR: total interest paid over 30 years – $289,595.47
• 7% APR: total interest paid over 30 years – $348,772.25
• 7.5% APR: total interest paid over 30 years – $379,293.06

Whoa! If we don’t qualify for the 5% loan, we end up paying more in interest over 30 years than the actual cost of the home! Using Bankrate’s amortization chart,  the majority of mortgage payments go towards the interest for the first 17 years of home ownership. This is why it is so important to shop around for the best mortgage rate. These figures also explain why so many people who purchased their homes at the peak of the market are upside down on their loans; not a position I envy.

With careful planning and homework, my goal is to be a responsible home owner by the end of 2010. An obtainable goal if I stick to my 3-step plan!