What About the Interest Rate
The mortgage interest rate is determined by many factors in the market and fluctuates over time. Historically rates have tended to hover in the 7-9% range. The average over the past 5 years has been 6%, much less expensive in comparison. However while borrowers have no control over the interest rate, they do have some control over the interest rate they’ll pay.
The interest rate a borrower can qualify for is largely determined by their credit score. A credit score is a number between 501 and 990 (higher is better) (link to info on improving your credit score) that reflects your credit worthiness based on your past borrowing and payment history (from credit cards, school loans, car loans, etc.). Your credit score will place you in one of three categories of mortgage interest:

Prime or A Credit - The Prime interest rate is the best (i.e. lowest) rate available. A person with a credit score of 720+ could qualify for this rate.
Alt-A or A Minus – A person with a credit score of 660+ would qualify for the Alt-A rate, which would be higher than the Prime interest rate.
Sub-prime – A person with a poor credit history (frequent delinquencies on payments, possibly has declared bankruptcy, etc.) would not be able to qualify for a mortgage at either the Prime or Alt-A rates. However, if their credit score was higher than 580 they could potentially qualify for a mortgage loan at subprime rates which would be significantly higher than the prime rate. Additionally sub-prime mortgages typically include a prepayment penalty.

A prepayment penalty is, as you might guess, a penalty that you pay if you pay off your loan entirely, although most terms will allow you to prepay up to 20% of the outstanding balance of your loan in a given year. A typical penalty could be 2-3% of the balance of the loan, or 6 months of interest. Although most penalty clauses expire after the 5th year, many sub-prime loans are ARMs with a 2-year introductory period at a lower interest rate. Thus the lender is attempting to ensure at least 3 years of higher interest expenses on the loan to recoup the cost and risk of issuing the loan.

The last thing you can do to influence your interest rate is to get a conforming (vs. non-conforming) loan. A conforming loan is one that is eligible to be purchased by either of the two government agencies that buy mortgages: Fannie Mae and Freddie Mac. Eligibility is determined by a number of criteria including credit history, down payment, etc. However a conforming loan is also one that is less than $417,000 for a single-family home. The interest rate on a non-conforming loan (i.e. the amount is greater than $417,000) will typically be higher than that on a conforming loan.

A Quick Note on Mortgage Insurance:
Most mortgages require a down payment of at least 20% of the value of the property, otherwise they require the borrower to pay mortgage insurance. Mortgage insurance protects the lender in the event that the borrower defaults. Depending on a number of factors, mortgage insurance can run anywhere from .2 - .8% of the outstanding loan amount annually.

Typically the borrower is stuck with mortgage insurance until the loan-to-value (LTV) ratio is less than 80%. When the house is initially purchased, a 20% down payment enables the borrower to avoid mortgage insurance because the LTV is equal to 80%. If the down payment is less than 20%, a borrower can still achieve a LTV of 80% by reducing the loan balance through amortization, or increasing the value of the home.

Example:
Purchase house valued at $100,000 and put only 5% down.
Mortgage amount - $95,000
Property value - $100,000

Loan-to-Value = $95,000/$100,000 or 95%

A few years go by and you’ve been steadily making amortizating mortgage payments. At this point the outstanding mortgage balance is $90,000. However the housing prices in your market have been increasing, and an appraiser now values your home at $120,000.

Now your Loan-to-Value = $90,000/$120,000 or 75%. Thus you would be eligible to have your mortgage insurance cancelled.

Additional Resources:

Mortgages 101 - Part I

Mortgage Professor

Mortgage Calculators

Arm Indices

Mortgage Articles