Mortgage rates are sensitive to inflation fears. When available money outweighs available goods or services, inflation occurs. The Federal Reserve Board may then increase the prime lending rate to slow inflation; lending institutions usually follow suit.
The annual percentage rate reflects the cost of your mortgage loan as a yearly rate. It also incorporates the fees incurred to obtain the loan, such as discount points and loan origination fee.
Once you apply, locking your interest rate guarantees that you will receive that rate as long as you close within a set period of time (30, 45, 60 or 90 days). Floating your rate is not choosing to lock your interest rate when you apply. Interest rates can increase or decrease between the time you apply and the time you close your loan.
Points and loan rates working together, how you ask? There is an inverse relationship between the interest rate and points charged on a loan: You can choose to lower your interest rate by paying additional points; conversely, you can choose to pay fewer points in exchange for a higher interest rate.
The basic idea of points is to pay a little up front in order to save big over the life of the loan. Each discount point you pay will typically lower your loan’s rate by .25%. Points are a good idea if you plan to hold onto your home for a long period of time. This allows you to offset the costs of paying for the points.
Your closing costs will include expenses such as points, taxes, appraisal, credit report, title insurance, mortgage insurance and attorneys’ fees. You will receive more specific information about types and amounts of closing costs applicable to your transaction and the state where your property is located when you apply for a loan.
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