Interest rates are a unique part of the U.S. financial system and mortgage rates are even more confusing. Understanding how they work could help you save some serious cash when it comes to your next home loan. Did you know there are both Interest Rates and APR (Annual Percentage Rates) in the home loan game? So what’s the difference?
APR looks at the overall cost of your loan and reflects the interest rate as well as other fees associated with your home loan such as closing costs and broker fees. Your interest rate affects the total of your monthly payment. This is a great example of why you should not just rate shop when looking for a home loan. You should also shop costs and fees when looking for the best deal on a mortgage.
If you are someone who is concerned about the overall cost of the funds you are borrowing, you should focus on APR, but if you are worried about your monthly payment being too high, focus on the interest rate. Another important thing to consider is what fees the institution is charging to write your loan. You will notice a difference in for-profit institutions (banks) and not-for-profit institutions (credit unions) when it comes to fees. Credit unions only charge the fees necessary to cover the cost of writing the loan whereas banks may charge higher fees to turn more profit for their shareholders. So, don’t just Google “current mortgage rates” and expect to get a clear picture of what you will be paying.
“I always recommend folks come in, sit-down with me and get a really good idea on what they qualify for and where their rate and fees will be before they shop for a new home. Rates depend on so many factors, so having a lender walk you through the process is definitely helpful,” says Nicki Jemmings, Real Estate Loan Officer the past eight years who has processed hundreds of loans.
Rates change daily in the U.S. depending on the economy, unemployment rate, and several other factors. The Federal Reserve (www.federalreserve.gov) raised interest rates three times in 2017 and will most likely raise rates again in 2018. Therefore, knowing how much you actually qualify for will save you some disappointment when you actually lock a rate for your home loan.
Locking your mortgage rate is a guarantee that the lender will deliver a specific interest rate at the closing of your loan. Loan rate locks typically last for 30, 45, or 60 days depending on how long the anticipated closing process will take. Check out this cool home buying guide from www.smartasset.com/mortgages for a really good look at the whole buying process.
Following are some factors you should think about when searching for your mortgage rate:
- Your credit score affects your mortgage rate. Just because an institution is advertising a specific rate does not mean you will qualify for that rate with your credit score. Often times, the lower the rate, the higher your score must be.
- The location of your home. Rural areas versus well populated areas can have a slightly different interest rate. Again, check with your lender and let him or her guide you through the process.
- The price of your home and the loan amount. I have not seen this personally, but buyers can pay a higher interest rate depending on the price range of their home.
- Down payment. Generally a larger down payment means a lower rate on a loan because there is less risk in lending.
- Loan term. How long are you going to pay your loan? The shorter the term, generally the lower the rate as well as costs and fees associated with your loan.
- What type of interest rate you have will affect the rate. Remember 2007/2008 when all those Adjustable Rate Mortgages were coming due and people couldn’t make their payments? Yes, those types of loans are still offered and can be a great tool for someone who needs a smaller interest rate for a few years.
- The type of loan you are taking. There are so many loan programs out there and each one can have an effect on the rate you pay. Think Conventional, FHA, USDA, and VA loans. Each one of these programs would have a different interest rate for the same person.
Check out the Consumer Finance Protection Bureau’s blog for detailed information on the types of loan programs and rates offered in the U.S. They also have a great tool kit for an overview of the home loan process. If you are looking for even more information on the mortgage process, head over to our page Everything You Need to Know About the Mortgage Process (and then some).
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