A mortgage is a loan used to finance the purchase of real property. A mortgage consists of several important variables, such as mortgage points, the interest rate, and fees. These factors determine the mortgage payment as well as how much the borrower will pay over the life of the loan.
Shopping for a home loan can be confusing because mortgages differ depending on the lender and interest rates tend to change daily. The interest rate on a mortgage is the rate the lender charges for borrowing the money. The rate varies depending on factors like the borrower's credit history and economic conditions such as inflation, housing prices, and the demand for mortgages.
Mortgage points are a type of fee paid by the borrower to reduce the interest rate. A borrower makes a one-time lump sum payment in exchange for a lower interest rate. One point, for example, is equivalent to 1% percent of the mortgage amount. For a $100,000 mortgage, one point is equal to $1,000. In general, the more points a borrower pays, the lower the interest rate. Points usually range from 0% to 3%.
Different lenders charge various settlement fees for a mortgage. Typical fees include:
Since the amounts of the fees vary from lender to lender, shopping around for the most competitive mortgage will help reduce these fees.
Federal law requires that mortgage lenders disclose the annual percentage rate, or the APR. The APR is the annual cost of the mortgage. The calculation of the APR includes interest, mortgage insurance, and fees. A loan with a lower APR may indicate a better value than one with a higher APR. However, since lenders make these calculations differently, it may be an unreliable indicator of the better loan. APRs are a less important way to assess a loan for a borrower that intends to pay off the loan early by refinancing or selling the property prior to the full term of the mortgage.
Paying mortgage points for a lower interest rate is not advantageous in every situation. Consider the following when deciding whether to pay more points or a higher interest rate.