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Understand rates, points and APR
Interest rates, points, annual percentage rate (APR)
seems confusing. Fortunately it is all about making
the down payment and monthly payment fit your
needs.
Know how interest rates
affect your payment
The
interest rate on a loan is used to calculate your
monthly payment. The higher the interest rate, the
higher your monthly payment. The lower the interest
rate, the lower your monthly payment. See our
monthly payment calculator
for a demonstration of how this works.
Lower your rate and payment
with points
Points are fees paid to the lender at closing. Each
"point" is equal to 1% of the loan amount. For a
$100,000 loan, a point equals $1,000. Two points
would be $2,000.
With
many loans, you can lower the rate by paying more
points. If you have the cash, it's a good way to
save money on interest over the life of your loan.
See how points affect rates. If you're low on
upfront cash, then go for fewer points.
Use the APR to compare loans
Home
loans are more than interest rates and points. They
also involve other costs. The APR expresses the
annual cost of a loan as a percentage, factoring in
not only its rate, but the points and other charges
over the life of the loan.
The
Truth-in-Lending law requires all advertisements for
home loan credit terms include the APR. The APR is
intended to enable you to compare terms of loan
products from different lenders.
To
make an accurate comparison, compare loans with the
same terms, interest rates and points. Then look at
the APR. The loan with the lower APR is the less
expensive loan.
Save cash with a "no origination fee" loan
Some
lenders charge an origination fee to cover the
administrative costs of processing a loan. If you
haven't much available cash beyond the down payment,
you might want to look into a no origination fee
loan.
Now that I found my home, should I lock in the rate
or let it float?
Ready to sign a contract? If you're afraid rates are
headed up, protect your buying power by locking in
the rate at the time you apply for your loan.
What should you look for in a rate lock?
Make
sure it allows enough time for your loan to be
processed. And get it in writing. This is important
because some lenders offer rate protection for just
a week or 10 days - not long enough for many loans
or home sales to be completed. If you exceed the
lock-in period and your rate expires, you may see
your loan rate go up.
Think rates might drop while your loan is
being processed? At the time of your application,
take a risk and let it "float" instead of locking.
You can watch rates and lock in at any time until
the day before your loan closes. The moment you tell
your lender to lock the rate, that's the rate you'll
get. But be careful. Rates are as difficult to
predict as the stock market. And if rates suddenly
shoot up, you could find yourself with a higher
monthly payment than you planned or, even worse,
unable to afford the home of your dreams.
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