ROBYN: I’m Robyn Moreno for howdini.com. Now more than ever, it’s a scary time to be a homebuyer. We’ve all heard horror stories about people who’ve lost their home due to sub-prime mortgages, and predatory lenders, but most homebuyers will need to get a mortgage. So how do you choose the right one? To answer that, and all of our questions about mortgage, is Gerri Willis, CNN Personal Finance Editor and author of Home Rich: Increasing the Value of the Biggest Investment of Your Life. What is the difference between a fixed-rate mortgage and an adjustable mortgage, and when is one better than the other?
GERRI: Well a fixed rate mortgage is exactly what it sounds like. The interest rate is fixed over the life of the loan, thirty years. But when you get an adjustable rate mortgage, the interest rate changes. And it depends. You can get a five-year adjustable, a ten. It just depends, that initial rate lock will be five years or ten years. Now, I have to tell you, in this market, the best thing is definitely a thirty year fixed rate mortgage. There’s just not that much difference these days between the interest rates on some of these five and ten year loans, and then a thirty year adjustable. But sometimes, when people absolutely know that they’re only going to be in a house for a short period of time, it makes sense to get an adjustable rate mortgage.
ROBYN: Is it always better, then, to get that thirty-year rate mortgage? Or does it really depend how long you’re going to be in your home?
GERRI: It does depend on how long you’re going to be in your home. But make sure you’re not giving away the house, so to speak, to get one of these arms. Because what happened during the boom is that a lot of people got really lousy loans. These adjustable rate mortgages had all kinds of caveats, they had high fees, high rates of interest and it really hurt people who got them. Now they can’t get out of these loans, and they’re really in trouble.
ROBYN: How important is it, then, for someone to get pre-approved for a mortgage?
GERRI: These days it is not easy, I have to tell you. You have to have a higher credit rating, as much as 780, 680 these days to actually get a loan. It’s very difficult and I think people are really, you know, trying very hard to buy these houses. Buying the house is easy; getting the mortgage is difficult.
ROBYN: What exactly does it mean when you’re pre-approved for a mortgage?
GERRI: Well pre-approved really doesn’t mean that much. What you want to be is pre-qualified. And that means you’re going to fill out a lot of paperwork. And at the end of the day, the bank is pretty much almost giving you the loan before you go in and bid for a house. This is going to make you more attractive to sellers; you’re going to be considered a very serious buyer.
ROBYN: How do I go about finding a mortgage lender?
GERRI: Well it’s pretty easy to find a lender these days. Credit unions offer lowers rates of interest to people who are members of these unions, and I have to tell you, it can be really, really attractive. Also, look at local financial institutions in your area. Small banks; often these banks can offer lower inter – lower rates of interest as well. It’s really worth checking out.
ROBYN: You know, you mention the Internet. But how trustworthy are these, like, you know, sort of Internet providers and are they more trustworthy than, say, conventional one?
GERRI: I think the conventional thing to, the, the, web for right now is really getting information on the loans, and who are the best people out there, instead of getting your loan there. Two great websites to think about: bankrate.com, hsh.com. You can go to these websites, they will tell you the rates being offered from institutions in your area. It’s really specific information. Now they assume they have a good credit rating, but you can get a sense of who, who out there is offering the best rates.
ROBYN: What is the role of a mortgage broker?
GERRI: Well a mortgage broker stands in between you and the lender. They’re really the salesperson, and they make their money on the spread. You need to make sure you’re working with somebody reputable, you know, check them out, ask friends and family for somebody good, and they’re best-used by people who maybe work for themselves, they have difficulty proving their income.
ROBYN: Thank you so much Gerri Willis, for helping us navigate this really tricky mortgage situation.
GERRI: My pleasure.
ROBYN: I’m Robyn Moreno for howdini.com.