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Mortgage Rates Explained
Your mortgage rate is determined by several factors:
- Your credit score
- The overall financial markets
- The points you pay
- The loan program you choose
Compare a variety of loan programs before you move forward.
If you pre-qualify or get “pre-approved” for a loan before you buy a house, the lending institution will commonly “lock-in” your interest for a set period of time, normally 30 days. If you do not close on your real estate transaction during this time, your interest rate is subject to change.
Annual Percentage Rate (APR)
The APR is the yearly cost of a mortgage, including interest, mortgage insurance and any points paid. It is expressed as a percentage, and can be higher than the interest rate your lender quoted you. The APR is designed to be a number representing the true annual cost of the loan program. Knowing the APR of a loan program you’re considering is useful when comparing different loan products and options.
Mortgage Rate Terms for ARM Loans
The terms used to describe mortgage rates can often be confusing to homebuyers, especially those associated with an adjustable rate mortgage. Here are some of the terms you’re most likely to come across:
Adjustment Period
Rates for an ARM are adjusted at set times, such as once a year. A new mortgage may have a fixed-rate for the first six months, followed by adjustment periods every year.
Payment Caps
Caps refer to how high or low your interest payments can be. The maximum protects the borrower and the minimum protects the lender. Caps also help guard against payments fluctuating drastically from one adjustment period to another.
Fully Indexed Rate
ARMs are based on one of many publicly published financial indicators, such as the US 30-year bond index. These indicators are combined with a predetermined margin that sets maximum and minimum changes to produce your interest payment for the period. For example, if the index was set at 6.5 percent, and your mortgage margin was 2.1 percent, your fully indexed rate (the amount you pay) would be 8.6 percent, the sum of both percentages.
Negative Amortization
At times, adjustments and payment caps can result in monthly payments that do not cover the interest you are being charged. If this is the case, the unpaid interest is added back into your principal.