Comparing mortgage interest rates

We all know that lower interest rates can save us lots of money.

The cost of a mortgage depends on the amount you borrow, the interest you pay and how long you take to repay. The amount you actually borrow after the fees and points are deducted is the loan amount or the principal. It is what will be used to figure the real interest or APR (annual percentage rate); on the money you are borrowing.

The interest of finance charge is what you pay to borrow the money. The amount repaid along with part of the principal in regular installments, is determined by the interest rate and the term of the loan.

Interest that you repay at the closing are called points. Each point is 1% of the loan amount. For example, on an $80,000 loan with 3 points, you would prepay $2,400.

Fees include application fees, loan origination fees, and other initial costs imposed by the lender. This equals the total cost of your home.

The term is the length of time you want to borrow the money. The longer the term, the lower the monthly payments, but the more you will pay in the end.

The interest rate may be fixed for the length of the loan or adjusted periodically to reflect prevailing interest rates. Over time, a lower interest rate will have the greatest impact on overall cost.

To reduce your mortgage expenses, consider a shorter mortgage with a shorter term. Your monthly payments will be somewhat larger, but you will pay less interest overall. A 15-year mortgage as opposed to a 30-year mortgage for the same amount can cut your costs by more than 55%.

Mortgages can have either fixed or adjustable rates, or sometimes a mixture of the two.
A fixed-rate mortgage is when the total interest and monthly payments are set at the closing. You repay the principal and interest in monthly installments over a 15, 20, or 30 year period. You know from the beginning what you will pay and for how long. You can choose to pay your mortgage more quickly, which means you will owe less interest. Or when interest rates go down, you may want to refinance your mortgage to get a lower rate or a different term.

An adjustable rate mortgage has a variable interest rate. The rate changes on a regular schedule-such as once a year-to reflect fluctuations in the cost of borrowing. Unlike fixed-rate mortgages, the total cost can’t be figured in advance, and monthly payments may rise or fall over the term of the loan. The rates are determined by using the index and the margin for the new rate.

All adjustable rate mortgages have caps or limits on the amount the interest rate can change. An annual cap limits the rate change each year, while a lifetime cap limits the change over the life of the loan.

Many states provide mortgages at below market rates for first-time buyers, provided that your income and the price of the home meet their guidelines. To locate mortgage sources in your community, you can contact the U.S. Department of Housing and Urban Development (HUD) at www.hud.gov.