Mortgage Rates: Explained

If you’re in the market to purchase a new home, you’ll want a deep understanding of mortgage rates. However, navigating the dark waters of the confusing financial lingo may be intimidating at first. Hopefully, with this handy guide from your team at Portland Home Loan, your mortgage experience will run as smooth as possible.

A mortgage contract simply specifies the terms of your home loan. Your interest rate is one of the terms that will be outlined in your mortgage contract. The more risky it is for the bank to loan money to you, the higher your interest rate will be. Risk factors that drive your final mortgage price include: credit score, occupancy (primary residence, vacation home, or rental property), and surprisingly, whether or not you include taxes and insurance in your monthly payment can affect the overall cost.

Speaking of overall cost of mortgage, another concept you will see when applying and shopping for a loan is the APR—or annual percentage rate. Your interest rate is the number that is used to calculate the monthly payment of the loan, but that isn’t the whole story of the cost of a mortgage. When you get a mortgage, be it purchase or refinance, there are fees associated with acquiring that loan. The fees are also known as closing costs, which are collected up front at the time of closing.

When you calculate the additional upfront fees and add that to the total cost of the mortgage, and then divide that total cost by the number of years of the loan term, you will get your APR.  The APR is always slightly higher than the rate.  FHA loans have very low rates, but very high relative APR’s as a result of the cost of
the FHA mortgage insurance throughout the life of that loan. Different loan types such as “Conforming Fannie Mae,” FHA or VA loans also have different pricing schemes connected to them.

There are two main types of mortgage interest rates, and one of the deciding factors on which rate you should choose is dependent on how long you plan to stay in your home. Those that plan to stay in their home for the long term will likely see more benefit from fixed interest rates. This type of rate means that whether you take out a loan for 10 or 30 years, your interest rate will never change. Your monthly payments on your loan will remain constant. You typically pay off your interest before you start paying your principal balance.

If you intend to keep your home for a short while, you may decide to go with an Adjustable-Rate Mortgage (ARM) instead. Since these interest rates are dependent on the economic index (a measure of economic health) and fluctuate with the market, your payments will adjust periodically to mirror the federal rates. There can be some profound advantages to using an ARM loan, but they are not for the faint of heart.

To have all your mortgage questions answered, please feel free to contact James Adair, Licensed Oregon Mortgage Broker, at 503-445-6033 or via e-mail. You can also apply for a loan or get a rate quote by visiting our website today!

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