Understanding Loans
Understand rates, points and APR
Interest rates, points, annual percentage rate (APR)… it can all seem confusing, but it's really all about making the down payment and monthly payment fit you and your lifestyle. So, let's look at how you can custom fit a rate to best meet your needs. Then, let’s talk about a way that you can protect the rate that you like while you shop for a home.
Know how interest rates affect your payment
The interest rate on a loan is used to calculate your monthly payment. The higher your interest rate is, the higher your monthly payment will be. Likewise, the lower your interest rate is, the lower your monthly payment will be. Simple? Yes, but abstract until you see it applied to your loan. See our monthly payment calculator for a demonstration of how this works.
Lower your interest rate and payment with points
Points are fees paid to the lender at closing. Each "point" is equal to 1% of the loan amount. For a $100,000 loan, a point equals $1,000. Two points would be $2,000. With many loans, you can lower the interest rate by paying more points. If you have the cash, it's a good way to save money on interest over the life of your loan. If you're low on upfront cash, then go for fewer points.
Use the APR (Annual Percentage Rate) to compare loans
Home loans consist of more than just interest rates and points, they also involve other costs. The APR expresses the annual cost of a loan as a percentage, factoring in not only its rate, but points and other charges over the life of the loan.
The Truth-in-Lending law requires all advertisements for home loan credit terms include the APR. The APR is intended to enable you to 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 3 days after you submit an application.
Save cash with a "no origination fee" loan
Some lenders charge an origination fee to cover the administrative costs of processing a loan. If you haven't much available cash beyond the down payment, you might want to look into a loan with no origination fee.
Now that I’ve found my home, should I lock in the rate or let it float?
Ready to sign a contract? If you're afraid that rates are headed up, then 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 and get it in writing. This is important because some lenders offer rate protection for just a week or 10 days — not long enough for many loans or home sales to be completed. If you exceed the lock-in period and your rate expires, you may see your loan rate go up.
Think rates might drop while your loan is being processed? At the time of your application, 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 as difficult to predict as the stock market and if rates suddenly shoot up, you could find yourself with a higher monthly payment than you planned or, even worse, you might end up being unable to afford the home of your dreams!
