The new rules of mortgage lending (02-07-09)

Shopping for a home loan? Things have changed - here's what you need to consider.

By Les Christie, CNNMoney.com staff writer February 4, 2009: 1:35 PM ET

NEW YORK (CNNMoney.com) -- If you're shopping for a mortgage these days, it's a whole new world out there.

But even buyers looking for a traditional mortgage are now faced with different factors to consider. Here is what you need to know: Paying up-front points. Borrowers can pay points - one-time, up-front fees - in order to reduce their mortgage's interest rate over the life of the loan. One point represents 1% of the mortgage value. But they often assume that they should never pay points, according to Alan Rosenbaum, founder of mortgage broker Guardhill Financial. That's a mistake, in his opinion. When interest rates were high, paying points didn't make sense because borrowers were very likely to refinance after rates dropped. They wouldn't hold their original loans long enough to recoup their up-front costs.

Of course, there are caveats. Buyers who are planning to refinance or sell within a few years shouldn't pay points, since the strategy simply doesn't pay in the short term.

Locking in the mortgage rate. Many borrowers choose not to lock in when rates are falling, as they have been, since they assume that the deals will only get better. But that's often a mistake.

His reason: Interest rates tend to jump up much faster than they inch down, meaning that buyers are much more likely to get stuck with a higher mortgage rate than they are to get lower one because they waited. Besides, locking in at the currently very affordable rates can give borrowers peace of mind, which is no small matter when you're trying to buy a house.

 

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