When you’re shopping for a mortgage loan – whether it’s purchase, refinance or home equity loan – comparing interest rates is an important part of the process. So before you start shopping for refinance loans, learn the basics behind interest rates and factors affecting your monthly payment.
How Interest Rates Are Determined
Home loan lenders charge interest to customers that borrow money from them. The interest rates that home loan lenders can charge are determined, in part, by the monetary policy of the Federal Reserve Board (or Fed) - a government-sponsored committee that monitors the nation’s economy and sets various interest rates to help control and manage it. When it comes to your mortgage payment, there are several factors that have a great impact on your payment.
Rates and Your Monthly Payment
The interest rate on a loan is used to calculate your monthly payment. Higher interest rates translate into higher monthly payment, while lower rates mean lower payments. While this may seem simple enough, there are other factors that affect your monthly payment.
Factors Impacting Monthly Payments
| Interest Rate |
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The fee charged to borrow money
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| Annual Percentage Rate (APR) |
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The APR expresses the effective annual cost of a loan
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Factors in not only the interest rate, but also points and other charges over the life of the loan
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| Points |
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Borrowers can lower the interest rate on a loan by paying points to the lender
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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.
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| Type of Loan – Fixed Rate vs. Adjustable Rate Mortgage |
Fixed Rate Mortgage:
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Fixed interest rate over the life of the loan
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Monthly payment will not change over the loan term.
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Typically higher initial interest rates than adjustable rate mortgages
Adjustable Rate Mortgage:
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Variable interest rate, typically adjusts every 6 or 12 months
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Usually offer low introductory interest rate.
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Lower mortgage payments at the beginning during introductory low interest rate.
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| Borrower's Credit History |
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Credit history is a key factor influencing the interest rate on a loan
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A high credit score indicates to lenders that the borrower poses a low risk for default, while a low credit score translates to higher risk.
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Borrowers with higher credit scores are able to get loans at lower rates
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