Understand Rates, Points, and APR
Interest rates, points, annual percentage rate (APR)…
It can all seem confusing. But it's really all about making the down payment and
monthly payment fit you and your lifestyle. So let's look at how you can custom
fit a rate to your needs. Then talk about a way you can protect a rate you like
while you shop for a home.
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. Simple? Yes, but abstract until
you see it applied to your loan. Contact us so that
we can better explain this using your specific situation.
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
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
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
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.
Countrywide protects your rate for 45 days (60 days on FHA and VA loans). Plenty
of time for processing a loan. Longer rate locks are even available if you're
building your home or need more time to close.
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.