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Your mortgage rate directly affects how high or low your monthly loan payments are. Even a fraction of a percent can result in a savings of thousands of dollars over the life of your mortgage. Here’s how mortgage rates work and how to get the lowest rate possible.
A mortgage rate is a percentage of your loan balance that lenders charge each year for borrowing money.
It’s the cost of borrowing money that you pay along with your principal payment. For example, if you have a 4% mortgage rate, you’ll pay 4% of your loan balance in interest each year, which is split up into 12 months and added to your monthly payment. As you pay off your loan principal, the amount of interest you pay also goes down each month. But due to a formula called amortization, your monthly payments remain the same over the life of your loan.
Mortgage rates change daily. These rate changes don’t affect fixed-rate mortgages, but they can affect adjustable-rate mortgages, which reset rates based on a schedule in your loan contract.
When applying for a loan, consider locking in your rate if the lender allows it. That way, you’re protected against higher rates should it fluctuate before closing.
Though most lenders advertise a range of interest rates you can expect on mortgages, those with strong credit scores typically get the lowest rates.
Lenders consider many factors when assessing your overall financial health, with most focused on:
When you’re looking to take out a mortgage or considering refinancing, you’ll find lenders advertising both APR and interest rates. While they both involve a rate at which you accrue interest, they are two different types of rates.
The interest rate is the fee you pay to a lender expressed as a percentage of the amount you’re borrowing. The APR — or annual percentage rate — is your interest rate along with fees like mortgage insurance, any discount points, loan origination fees and some closing costs. It’s why the APR is often higher than the interest rate.
When you’re shopping for a mortgage, comparing APRs among lenders can give you a better sense of the total cost of the mortgage. But if you’re shopping for an adjustable-rate mortgage (ARM), your APR may change when your interest rate changes.
If you build in the time to shore up your financial health, you’ll be in a better position to land the lender’s lowest interest rate:
Here are a few strategies to help you effectively compare mortgage rates.
Your mortgage rate is an important factor when choosing a lender and a home loan. When shopping for a mortgage, compare advertised APRs versus interest rates. APR takes into account your mortgage rate, discounts and other charges that come with borrowing. If you aren’t in a hurry, take steps to improve your overall financial health so that you’re better positioned for a low APR.
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