When you secure a mortgage to buy a house, the lender charges you a fee, known as interest, for borrowing money. The interest must be paid in addition to the balance of your loan. Lenders calculate the amount of interest you pay by charging you a percentage of your monthly mortgage payments. The percentage, known as the interest rate, can fluctuate as you shop for a loan and generally depends on market conditions and the type of mortgage that you receive. There are two primary types of interest rates: fixed rates and adjustable rates. A fixed rate is one that is set at the time of purchase. With a fixed interest rate you lock in the interest rate for the entire term of the loan. With an adjustable rate, the interest rate changes as national interest rates increase or decrease. Ideally, you want to apply for a mortgage when interest rates are low, as it allows you to borrow more money than a high rate loan with the same monthly payment. In addition to the interest, you must also be aware of the annual percentage rate, or APR (A-P-R). Unlike the interest, the APR, calculated by using a standard formula and expressed as a percentage, shows the yearly, not monthly, cost of the loan. It's higher than the interest rate because it also includes the cost of points, mortgage, and other fees included in the loan. Since all lenders apply the same rules in calculating the annual percentage rate, it should provide you with a good basis for comparing the cost of loans. However, you must compare similar loan products for the same loan amount. By law, the APR must always be disclosed to you within three days after you apply for a loan.
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