Let's learn more about picking mortgage loan rates, points and APR. At first, making sense of interest rates, points and annual percentage rates (APR) can be daunting. But it doesn't need to be. Like choosing the right mortgage loan type, it's all about choosing the down payment and monthly payment that fits your needs and lifestyle. The interest rate on a mortgage loan is used to calculate your monthly payment. The higher the interest rate, the higher your monthly payment. The lower the interest rate, the lower your monthly payment. Use a mortgage loans calculator to see how this works. Also know as mortgage loan "origination fee," points are fees paid to the lender at closing.
Each point is equal to one percent of the mortgage loan amount. For a $100,000 mortgage loan, one point equals $1,000. Two points would be $2,000. So if you have the cash to put towards paying points, it may be a good way to save money on interest over the life of your mortgage loans. See how points affect rates. If you're low on upfront cash, then go for fewer points. All the points you pay on a home purchase mortgage loan are deductible in the year you pay for them. Consult your tax advisor for more details. The APR expresses the annual cost of a mortgage loan as a percentage, factoring in its rate, as well as the points and other finance charges over the life of the mortgage loan.
The Truth in Lending Act requires that all advertisements for mortgage loans credit terms include the APR. The APR is intended to enable you to fairly compare terms of mortgage loan products from different lenders. To make an accurate comparison, compare mortgage loans with the same terms, interest rates and points. Then look at the APR. The mortgage loan with the lower APR is the less expensive loan. If you're afraid rates are headed up, protect your buying power by locking in the rate at the time you apply for your mortgage loan. What should you look for in a rate lock? Make sure it allows enough time for your mortgage loan to be processed.
This is important because some lenders may offer rate protection for a short period of time, say 10 days - not long enough for many mortgage loans or home sales to reasonably be completed. If you exceed the lock-in period and your rate expires, the lender may not honor the rate you locked. Consult your mortgage loan advisor for advice on locking in your rate. Think rates might drop while your mortgage loan is being processed? At the time of your application, you might want to take a risk and let it "float" instead of locking. You can watch rates and lock in at any time until the day before your mortgage loan closes.
The moment you tell your lender to lock the rate, that's the rate you'll get. But be careful. Rates for mortgage loans are difficult to predict just like the stock market. And if rates suddenly shoot up, you could find yourself with a higher monthly payment than you planned or, even worse, be unable to afford the home of your dreams.