Mortgage rates, explained

What will my interest rate be?

Since broader mortgage rate trends determine your particular rate, it may vary day-to-day, or month-to-month which is why locking in your rate is important.

Want to know an estimate of your mortgage rate today? Let us know! 

What is APR?

The term annual percentage rate (APR) is the interest rate for the whole year reflecting the costs and fees of a mortgage as a standard yearly rate. It is designed to measure the true cost of a loan, to try and show a level playing field for borrowers to compare lender’s fees.

The APR is likely to be higher than the stated note rate or advertised rate on the mortgage, since it takes into account loan points and other loan costs.

Because APR calculations are affected by the various fees charged by lenders, The best way to compare mortgage loans is to ask lenders to provide you with an estimate of their costs.

The following fees are generally included in the APR (but not inclusive):

• Points – both discount points and origination points
• Pre-paid interest. The interest is paid from the date the loan closes to the end of the month.
• Loan-processing fee
• Underwriting fee
• Document-preparation fee
• Private mortgage insurance
• Escrow fee 

The following fees are normally not included in the APR:

• Title or abstract fee
• Borrower Attorney fee
• Home-inspection fees
• Recording fee
• Transfer taxes
• Credit report
• Appraisal fee 

Principal vs interest

The “Principal” is the original amount you borrowed, while the Interest is the fee charged to you to borrow that money. 

Interest is calculated at every payment based on the remaining principal balance of your loan. This means if you pay off your loan early, no additional interest might accrue or be charged based on the loan’s original time period and terms. 

At the beginning of your loan, a majority of the monthly payment will be paid toward the interest accrued. As the principal of your loan decreases (the amount you originally borrowed), the less you’ll pay in interest. Additionally, if you make advance payments on your loan, the additional funds could be applied directly to your principal, since you only accrue interest on what you currently owe. 

What does it mean to “lock” the interest rate?

Mortgage rates can change from the day you apply for a loan to the day you close the transaction. If interest rates rise sharply during the application process it can increase the borrower’s mortgage payment unexpectedly. Therefore, a lender can allow the borrower to “lock-in” the loan’s interest rate guaranteeing that rate for a specified time period, often 30-60 days, sometimes for a fee.

Fixed Rate Mortgages (FRM)

The traditional fixed rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can typically be paid off at any time without penalty. This type of mortgage is “amortized”, meaning it will be completely paid off by the end of the loan term.

Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan’s term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which could allow you more affordability options.

ARM loans usually have 30-year terms with the initial rate being fixed between 1 year to 10 years. All ARM loans have a “margin” plus an “index.” Margins on loans range from 1.75% to 3.5% generally depending on the index and the amount financed in relation to the property value.

When the initial fixed-rate period ends, the margin will be added to the average index and rounded to the nearest 1/8 of one percent to calculate at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, three years, five years, etc. but there are factors limiting how much the rates can adjust. These factors are called “caps”. 

For example: Suppose you had a “3/1 ARM” with an initial cap of 2%, a lifetime cap of 6%.  The highest rate you could have in the fourth year would be 2% over where you started, and the highest rate you could have during the life of the loan would be 6 over your initial rate.

While ARM loans can adjust the interest rate periodically based upon agreed terms at closing, make sure you have a fully amortizing loan and that your loan pays off at the end of the term. Be careful to  watch for any terms such as prepayment penalties or negative amortization. These are not common and are generally not advised.

Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.