There’s a good reason why people focus so much attention on home loan interest rates when shopping for a mortgage – they have a big effect on what your monthly payments will be and how much you’ll pay over the long run.
A difference of half a percentage point on a $250,000 home loan means a difference of about $75 a month on your mortgage payment – or about $26,000 over the life of a 30-year loan. So little differences add up.
Home loan rates today are usually advertised online by mortgage lenders, which makes it easy to shop around and make comparisons.
People typically start shopping for a mortgage by seeking out the lowest home loan interest rate they can find. However, just focusing on the lowest rate can be misleading. Lenders sometime disguise the actual cost of a loan by charging higher closing costs and fees, which can exceed the savings from a lower rate.
For this reason, it’s a good idea to focus on the Annual Percentage Rates (APR), rather than mortgage rates, when doing a home loan comparison. The APR reflects the total cost of a mortgage (the rate and fees) in terms of an interest rate and must be included with any advertisement or offer of a mortgage rate. It’s not a perfect measure, but it offers a good rule of thumb.
Unlike ticketed items in the grocery store, home loan rates don’t have a single fixed price for all customers. Each borrower gets a rate that’s customized to their particular circumstances.
Different lenders will price their rates differently. Some may charge higher fees as a way of being able to offer a lower rate. Others may participate in various types of home loan programs that have different pricing. So it’s important to shop around to find the one that’s the best fit for you.
Discount points are a type of fee that has a major impact on a home loan rate. Known as points for short, they’re a way of buying a lower rate. Each point you buy costs 1 percent of the loan amount and reduces the rate by a certain amount – often one-eighth to one-quarter of a percentage point.
Buying points can often save you money over the long run. However, lenders sometimes use them to disguise the true cost of a loan – listing a low rate but with several points added in. When checking home loan rates, always look at how many points are included – a low rate that includes two or three points may not be the great deal it appears.
Another factor affecting home loan rates is credit scores. Borrowers with FICO credit scores of 740 or more are eligible for the lowest home loan rates. Lower credit scores mean higher rates and fees, sometimes substantially – a borrower with a score in the low 600s may be charged a rate a full percentage point or a point and a half higher than a borrower with excellent credit.
Home loans aren’t a one-size-fits-all proposition. Lenders offer a lot of different home loan options and loan types to meet the needs of different
types of borrowers.
Mortgages backed by Fannie Mae and Freddie Mac are called conventional or conforming loans and constitute the bulk of U.S. residential mortgages. These generally offer the best rates and lowest fees for borrowers with good credit or a substantial down payment.
FHA loans are mortgages backed by the Federal Housing Administration. These are popular with first-time homebuyers, offering down payments of as little as 3.5 percent and less stringent credit requirements compared to conventional mortgages.
VA loans are mortgages available to qualified veterans, active-duty personnel and certain others with military affiliations. They offer competitive rates and are one of the few types of mortgages that allow a home loan with no down payment these days, up to certain purchase limits.
Jumbo loans are home loans that exceed the lending limits of conventional and FHA mortgages. Depending on where the home is located, those limits range from $424,100 to $636,150 for a single-family home in the contiguous U.S. states. Lenders must finance these loans outside of the Fannie/Freddie/FHA structure, and without those guarantees, so interest rates on jumbo loans tend to be somewhat higher than on those types of loans.
The basics of getting a home loan are fairly simple – you borrow a set amount of money and pay it back over a certain length of time at a specifiedinterest rate. The details, though, can get tricky.