Understanding Interest Rates
When you need financing to buy your home, it’s important to have a good understanding of your interest rate. It’s one of the key factors that determines how much you’ll pay each month. It also impacts the final total you pay for your home over the life of the loan … by tens of thousands of dollars!
We all want to pay as little each month for our homes as possible, whether it’s your forever home or a place you will live for just a few years. Understanding the difference between fixed and adjustable-rate loans (ARMs) as well as APRs can help you choose the right loan for your situation.
Fixed Rate vs. Variable Rate
A fixed-rate loan guarantees that your interest and principal portion of the payment will remain the same the entire term of the loan. If you plan on remaining in your home for more than five years and have good credit, a fixed-rate loan is likely the best option. Fixed-rate loans help you budget long term because the interest and principal portion of the payment don’t change.
An adjustable-rate loan will fluctuate at certain intervals during the loan. Usually, they remain fixed for 3, 5, or 7 years and then have annual adjustments. It’s much more common these days for that adjustment to go up, rather than down. That means for the first part of the loan you’ll have one payment and at the end of each adjustment period, the payment may change. This is less of a risk for homeowners who know they will only be in their home for a short time and don’t need to worry about the interest rate going up at the end of the fixed period.
APR and Interest Rate
Most people see those two numbers and wonder why they’re different and what they mean. The interest rate is the cost of only what you’re borrowing. The APR is the annual percentage rate and refers to the actual cost of the mortgage. The APR includes the interest rate plus any fees, like points and closing costs, and expresses it as a percentage.
You want to look at the different APRs of the loans you qualify for so you are comparing apples to apples. It would make sense that the lowest interest rate would always be the best choice, however, if you are only going to be in a home for a few years, a higher interest rate with fewer points and fees may save you money. If you’re buying your forever home, the lower the interest rate, even with higher fees, tends to work out better over the life of the loan.
Talking to a mortgage professional will help you understand how rates, APRs and other mortgage options would work in your situation. To learn about the best option for your needs, Hamilton Group Funding is ready to help. Contact us at the branch closest to you, and we’ll help you understand the best loan for your income, credit, assets, down payment, and future plans.