How to find the best mortgage rate
The calculation of mortgage rates is a source of confusion to many would-be homeowners. There is a lot of variance among lenders when it comes to term lengths, interest compounding, penalties and conditions.
To begin to make sense of your many options, the first thing you'll need is a good working understanding of home mortgage rates. Your home mortgage loan's interest rate is the single most important determining factor in getting the best deal possible.
The Annual Percentage Rate (APR)
When you get mortgage quotes from a lender, you are given two key pieces of information: the length of the term and the interest percentage. This percentage represents the rate at which interest is calculated on the outstanding balance of your mortgage loan on an annual basis.
While it's true that a low mortgage rate is better, the APR is not the only factor you should consider. In fact, the best mortgage rate available to you may not be the one with the lowest APR. Most lenders charge what they call "points," which are loan payments due up front, as well as closing fees and application fees. Mortgage quotes are delivered as a term of time and an APR; for example, you might get a 20-year mortgage with a 5.25 percent APR.
In addition to mortgage rates and points, you need to pay close attention to the fine print that details the terms and conditions of your mortgage. Some lenders penalize homeowners for paying off the mortgage early or selling the house at a profit before a specified period of time has elapsed. Also watch for extra fees and charges attached to double payments, missed payments and mortgage refinancing.
Factors Affecting Mortgage APRs
Your home mortgage rate is affected by a range of factors, but chief among them is the current prime interest rate, which is set by Wall Street. The prime rate is an indexed nationwide interest rate average, and mortgage lenders typically charge anywhere from 1 to 3 percent more than the prime rate. Sub-prime lenders are mortgage financiers that offer mortgage quotes with interest rates below prime, but you should approach these lenders with caution — the collapse of the sub-prime mortgage market was a key contributing factor to the economic meltdown of 2008–09.
To have an idea where the current mortgage rate should be, check the position of the prime interest rate and use that as a guide. You'll find significant variance from lender to lender no matter what the prime rate is, and mortgages with shorter terms tend to have lower APRs because the bank will recover their investment more quickly. Thus, if you can put down a large down payment, you'll get a better mortgage rate from your lender.