First things first. What is a mortgage rate? This is a question that comes up among new and experienced homebuyers more often than not.
The mortgage interest rate: Defined
A mortgage interest rate reflects the amount of interest you’ll pay on your mortgage. Throughout 2016, mortgage rates remained low and predictable, staying under 4 percent. At the end of 2016, mortgage interest rates trended upward, with some fluctuations, following the presidential election. At the time this article was published (June-July 2017), mortgage rates sat under 4 percent, according to estimates from Freddie Mac.
Mortgage rates are always changing because they’re dependent on a few different variables:
- Economic growth/recession
- Economic indicators, including the Federal Funds Rate, the Consumer Price Index, and the Producer Price Index
- Money supply, determined by the Federal Reserve
- Forecasted inflation
- Housing market conditions
Mortgage rates can change daily. A skilled lender can assess the market and let you know if mortgage rates are expected to drop or rise in the near future. Interestingly, the best day to check in on mortgage rates may be a Monday. Wednesday is the day when mortgage rates are most skittish, while Mondays are most stable. On a Wednesday, you could see mortgage rates fall or suddenly spike and become more expensive.
Whenever mortgage-backed securities (MBS) in the market rise, mortgage interest rates drop. Because of this, many industry experts consider MBS to be a safer investment option for global investors. This is why mortgage interest rates have reached record lows in recent years. But as the economy improves, MBS sells, and mortgage interest rates may rise again.
The APR: Defined
The APR might be one of the most misunderstood numbers in the home loan process. If you haven’t taken the time to read and research, you’ve probably been interchanging your mortgage interest rate with its APR all along. This little mix-up is common in the mortgage game since the APR and interest rate can appear similar. But there is a small yet important distinction between the two.
Otherwise known as the Annual Percentage Rate, APR is the cost of credit broken down into an annual rate.
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To understand what APR really is, it helps to compare your mortgage loan interest rate to its annual percentage rate:
- You’ll see the interest rate, or the annual cost of your loan, calculated into a percentage. Your monthly mortgage payment will be based on this interest rate, and not the APR.
- The APR includes a loan’s interest rate, or its annual cost to the borrower, plus all those extra fees quoted with a loan program. Just like an interest rate, the APR will also be reflected in a percentage.
- Unlike an interest rate, the APR will have additional charges, including closing costs, mortgage insurance, loan origination fees, and discount points, lumped in.
The APR was created for consumer loans, and especially for mortgage loans, to help the average borrower better compare apples to apples on similar loans from different lenders using one set rate. The APR is that across-the-board rate that can be used to gauge your total cost of credit on a loan. Regulation Z of the Federal Truth-in-Lending Act requires a loan APR to be quoted in every consumer agreement.
Where to find the right mortgage rates: 4 lender-approved tips
For countless homebuyers, shopping around for a mortgage rate can be a negative experience. Not only can it get confusing, but many buyers run into lenders that make empty promises just to make a deal, Shelly D. Johnson, [NMLS ID: 227406; 4372 N. Loop 1604 W., Suite 300, San Antonio, Texas, 78249; Branch NMLS: 281018] Divisional Risk Manager at Cornerstone Home Lending, explains. When you know what to look for, you can separate the good from the bad to get into a home loan that you’re comfortable with.
What are the benefits of one of the most popular mortgage types, a 30-year fixed-rate loan? Find out more here and request an interest rate.
To make buying a house easy, we give this insider guidance to all our buyers, without exception:
1. Don’t shop around with someone you don’t know.
It’s important to shop around to know that you’re being quoted a competitive rate, but Johnson urges buyers to focus on comparison-shopping among lenders with experience you can trust. At this time, it helps to look for those standout details in the lenders you reach out to for a mortgage rate quote: Do they honor their commitments? Do they provide exceptional customer service? Will they do what it takes to help you close on time? Do they know the right products and loan programs to fit your needs?
2. Know what’s most important to you before you talk to a loan officer.
For every buyer’s unique financial situation, this “most important” factor will be different. You may be seeking the lowest monthly payment possible, or maybe you’re looking for the lowest down payment upfront. Help your loan officer help you. Nail down your nonnegotiables in advance, before you request a rate quote.
3. Get information on loan products, loan terms, and payments.
“Do your homework,” says David Reiss, Professor of Law and Academic Program Director of CUBE, The Center for Urban Business Entrepreneurship at Brooklyn Law School. “First of all, you need to understand all of the important loan terms such as principal, interest, fixed rate, ARM.” Reiss recommends getting a firm grasp on the basics before comparison-shopping lenders, choosing a loan type, comparing the total loan cost using APR, and ultimately deciding on a mortgage. “Then, when you commit to your mortgage, you will know that you did a thorough job in identifying a good deal,” he says.
4. Take the time to get prequalified.
Requesting a mortgage rate quote is one thing, but getting prequalified for a home loan is the first official step you’ll take toward buying a house. You won’t know how much house you can afford until you get prequalified for a mortgage. David Bakke, personal finance expert at Money Crashers, suggests comparison-shopping with at least three different trusted lenders, as rates and fees do vary. “And you should always go through the prequalification process so you know how much home you can afford,” Bakke says.
Request a mortgage rate and find out how much house you can afford: Get prequalified online.
Compare apples to apples before you decide
You may have noticed by now that lenders charge their own fees, which can fluctuate greatly. One lender may choose to waive a fee but add on another. Another lender might quote an interest rate before adding or subtracting discount loan points that can change the total cost of a mortgage.
You can determine you’re getting a good deal on a loan by comparing the cost of some of the most common lender fees:
- Application
- Appraisal
- Courier
- Credit report
- Discount points
- Document prep
- Inspection
- Loan origination
- Notary
- Recording
- Processing
- Tax service
- Title search
- Underwriting
These loan fees may seem like small potatoes compared to the ever-important interest rate, but they’re a prime indicator for finding a good mortgage loan from a fair lender. All lenders are required to provide a free written fee estimate for any of the costs listed above. After you’ve applied for a mortgage, you can expect to receive a Loan Estimate (LE) from your lender. If you applied for more than one type of loan, an LE will be broken down for each loan type. The APR for a loan will be listed on page 3 of the LE, in the comparison section.
An APR is another comparison tool. When you compare a loan’s APR to its advertised interest rate, an APR that’s noticeably higher than the interest rate may be a red flag that added costs are attached to the loan.
Remember, mortgage interest rates have recently gone up, which makes accurately assessing and comparing more important than ever. For those who are short on time, our free LoanFly app makes it easy. Input your info in the app, request a free quote, and use our insider mortgage shopping tips to compare.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.