The difference between good and bad mortgage rates could amount to thousands of dollars over the time it takes you to repay what you owe. Because of this, it is important to know what exactly determines your rates when you apply and what you can do to lower it.
How Does a Lender Determine My Mortgage Rate?
Your annual percentage rate depends on external factors, such as inflation, the state of the economy, trends in the real estate market, monetary policies that the Federal Reserve has set, and average mortgage rates charged by other lenders. Your APR also draws on your personal situation, specifically your creditworthiness and past borrowing patterns along with rates that lenders apply to other consumers with whom you share the same economic profile.
Would I Receive a Lower Rate if I Pay Points/Origination?
A lender considers points/origination as a form of interest-so, yes, you typically would receive a lower APR if you pay points during the closing process. Each point equals one percent of the mortgage amount, and you generally pay it upfront in exchange for a reduced interest rate during the life of your money.
Remember, though, that it means you must dole out more money at closing because you must include things like down payment and points/origination when writing your check or setting your wire transfer.
Should I Only Apply with a Lending Institution that Has the Lowest APR?
Lending institutions often engage in a race to the bottom when it comes to setting an alluring and affordable APR for prospective borrowers. But don't just look at the interest rate when shopping for a mortgage because a significantly reduced APR might imply higher costs in other areas, such as closing fees. These fees cover things as varied as paperwork preparation, title work, and appraisals.
Before applying for a mortgage, you should review each lender's entire financing proposal, not just one or two aspects. Taking a holistic approach will enable you to evaluate the pros and cons of each financing proposal and to determine why a specific proposal stacks up better against others.
What Does "Lock" Mean?
A rate lock means that your lender agrees to guarantee a mortgage's interest rate and points/origination for a specific number of days. If interest rates increase during the lock period, the lending institution still has an obligation to honor its contractual word and not raise your APR.
Locking or Floating my Interest Rate: How Do I Figure out the Better Option?
It all comes down to gut feeling or, rather, an educated guess based on where you think interest rates are heading in the next two, three, or four weeks. Interest rates are subject to the vagaries of financial markets and the general economy, so nobody can tell you for sure whether interest rates will rise or fall during a specific period.
If you think interest rates will rise before you close, you may want to lock in. Otherwise, you are better off opting for a floating interest rate.