There’s no way around it. Smart buyers know that buying a house requires learning the terms that will come up throughout your home buying journey. Perhaps the most important terms are those you’ll run into when getting ready to buy a home and applying for a mortgage. Because understanding the terms your mortgage lender will use can help you make the best decisions for your financial future.
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth, and Federal Reserve policy. Over time, inflation has the largest influence on interest rates. A modest rate of inflation will almost always lead to lower interest rates, while rising inflation normally causes interest rates to increase. Our nation’s central bank, the Federal Reserve, sets policies designed to keep both inflation and interest rates relatively in check.
Points are additional loan fees charged by your lender. They’re considered a form of interest. Each point is equal to one percent of the loan amount. Points are paid at your loan closing, often in exchange for a lower interest rate over the life of the loan. This means you may decide to come up with more money at closing, but it should lower monthly payments over the life of your loan.
To determine whether it makes sense to pay points, compare the cost of the points to the monthly savings you’d realize with a lower interest rate. To do this, divide the total cost of the points by the savings in each monthly payment. This result is the number of payments you’ll make before you actually begin to save money by paying points. If the number of months it takes to recoup the points is longer than you plan on having this mortgage, consider a loan option that doesn’t require you to pay points.
Your mortgage lender should be able to help you with this calculation if you’re unsure of how to do it. That lender may have a simple points calculator available online or you can google a simple calculator mortgage rate with points calculator like this one from BankRate.
APR (Annual Percentage Rate) is the actual cost of obtaining financing. The Federal Truth in Lending law requires that all financial institutions disclose an APR when they advertise an interest rate. But the APR is only a guideline to use when shopping for a mortgage. When deciding on the loan that’s best for you, it’s important to look at the total fees, such as appraisal, title and any document preparation or closing fees not included in the APR.
If you go with an adjustable rate mortgage, it’s also important to consider the “Note Rate” and to factor in potential rate adjustments. Be sure to ask your lender if you’re unsure of how these apply to your situation.
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You can also ask your Beyond Realty agent for help understanding how these terms apply to your home purchase plans.
