1. What is the difference between APR and interest rate?
The APR (annual percentage rate) reflects the cost of your mortgage loan as a yearly rate. It also incorporates the cost to obtain the loan, such as discount fees and loan origination fee. The interest rate is the actual note rate.
2. Why is the Annual Percentage Rate (APR) on the Truth-in-Lending disclosure higher than the rate shown on my mortgage note?
The rate reflected on the APR shows the cost of the credit as a yearly rate. This rate is generally higher than the rate stated on your mortgage note because, in addition to the interest rate, APR includes other costs such as origination fee, loan discount points, pre-paid interest, and mortgage insurance. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.
3. What is an origination fee?
The amount charged for services performed by the company handling the initial application and processing of the loan.
4. What is a discount point?
A discount point is paid to the lender to permanently buy down or lower an interest rate. It is usually a percentage of the loan amount.
5. May I pay additional discount points to reduce my interest rate?
Yes, most lenders will allow you to pay additional discount points to lower your interest rate.
6. What are lender fees?
Lender's fees are fees that offset the cost of producing the loan. Different companies may refer to them by different names, such as, processing fees or underwriting fees.
7. How are rates determined?
Rates can change daily or even more than once within the same day. The changes are based on many different economic indicators in the financial markets. To obtain current interest rates, contact your mortgage lender.
8. How can I compare rates and fees when shopping for a mortgage?
When comparison shopping, look at points, fees and the Annual Percentage Rate (APR). The APR includes the fees that are charged on your loan. Although one lender may have a slightly lower rate, they may charge more fees, and hence have the same APR as a lender with the slightly higher rate.
9. What is prepaid interest?
This is the interim interest that accrues on the mortgage loan from the date of the loan closing to the beginning of the period covered by the first monthly payment. For example, if your closing date is scheduled for June 15, the first mortgage payment is due August 1. The lender will calculate a per-day interest amount that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1. Some lenders prohibit the collection of pre-paid interest.
10. What is the difference between 'locking' and 'floating'?
A lock gives you a specified period of time - usually 60 days - of protection from financial market fluctuations in interest rates by setting the range of pricing available to you.
Your final rate, which may not be determined until closing, will reflect the pricing that was available at the time you locked for loans with your specific transaction characteristics and your credit profile. While locking does not guarantee that a specific rate will apply, it does ensure that your loan pricing will be unaffected during the lock-in period by changes in financial market conditions.
If you choose to "float" or defer "locking," your rate will fluctuate with the market and will be subject to both upward and downward movements in the market. The benefit to floating is if interest rates were to decrease, you would have the option of locking in at a lower level of rates.
11. What is a 60-day lock?
This lock gives you 60 days of protection from financial market fluctuations in interest rates by setting the range of pricing available to you. Your final rate, which may not be determined until closing, will reflect the pricing that was available at the time you locked for loans with your specific transaction characteristics and your credit profile. While locking does not guarantee that a specific rate will apply, it does ensure that your loan pricing will not be affected for the next 60 days by changes in financial market conditions.
12. When can I lock and how much does it cost?
Most lenders will allow you to lock once you have found a property and as late as up to five business days before closing. Some lenders may allow you to lock prior to finding a property. Rate locks and fees vary by lender.