Understanding Mortgage Interest Rates

Mortgage interest rates will vary daily, and over a several week period or several months, these variations can cause significant changes in your monthly payment. That’s why it’s important to lock in your mortgage rate when applying for a loan.  As an example, if interest rates went from an average of 5.77 percent to 6.33 percent, the monthly payment on a $150,000 mortgage would increase by $100. With interest rates determining your monthly mortgage payment, you can buy a higher priced home when interest rates are low than when they are high.

There are two basic types of mortgages. While mortgages can be packaged in many ways, there are only two types of interest rate mortgages: They are the fixed-rate and the adjustable-rate mortgages. The interest on a fixed- rate mortgage will remain the same over the life of the mortgage. The interest on an adjustable-rate mortgage can increase according to the terms set in the mortgage.

Locking Interest Rates

Likewise, if rates fall, you could realize a decrease in your mortgage interest rate. Both of these rate changes can result in a change in your monthly payment. A decrease in the interest rate will result in a decrease in your monthly payment while an increase in the rates will result in an increase in your monthly payment. Some mortgages will carry a fixed interest rate for a period of time and then convert to an adjustable rate mortgage. These mortgages are called Hybrid mortgages.

A home buyer can lock in an interest rate for a period of time, usually 30 days. The benefit to locking in a rate is to obtain protection against mortgage interest rates rising. The lender will lock in the interest rate available on the day you accept a lock in. You can also get an option for a “float down” which enables you to take the lower rate if rates drop before you close on the home. If either of these two options is offered for a fee, then you should do the math before accepting, since the costs may not be worth the potential gain.

Understanding APR

Don’t overlook the APR which is the Annual Percentage Rate, and this number includes the interest as a true number if you are financing points or other costs. The interest rate is just the rate of interest that is charged only on the mortgage alone. Points or Discount Points represent a percentage of the mortgage that is being paid to lender as a part of their interest up front. A point is 1 percent of the mortgage and the number of points will vary between lenders. Always ask about the points and fees a lender charges before agreeing to accept a mortgage.

It is best to mortgage shop because there could be a variance between companies not only in interest charges but in fees also.