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 loan type, it's all about choosing the down payment and monthly payment that fits your needs and lifestyle.
See How Your Interest Rate Affects Your Payment
The interest rate on a 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 the Mortgage Loans Online calculator to see how this works.
Lower Your Rate and Payment with Points
Also know as a loan's "origination fee," points are fees paid to the lender at closing. Each point is equal to one percent of the loan amount. For a $100,000 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 loan. 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 are deductible in the year you pay for them. Consult your tax advisor for more details.
Use the APR to Compare Loans
The APR expresses the annual cost of a loan as a percentage, factoring in its rate, as well as the points and other finance charges over the life of the loan.
The Truth in Lending Act requires that all advertisements for home loan credit terms include the APR. The APR is intended to enable you to fairly compare terms of loan products from different lenders. To make an accurate comparison, compare loans with the same terms, interest rates and points. Then look at the APR. The loan with the lower APR is the less expensive loan.
Lenders also provide the APR along with a loan's interest rate in the Truth in Lending Disclosure Statement. This document will be mailed within three days of your application submission.
Know When to Lock If you're afraid rates are headed up, protect your buying power by locking in the rate at the time you apply for your loan.
What should you look for in a rate lock? Make sure it allows enough time for your 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 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 Loans Online loan advisor for advice on locking in your rate.
Think rates might drop while your 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 loan closes. The moment you tell your lender to lock the rate, that's the rate you'll get. But be careful. Rates 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.