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Shopping online for rates
When shopping for mortgage loan rates online, consider the following steps:
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Look for trends in the direction of interest rates. Mortgage rates change by only a few basis points each day. However, over several days or longer, these changes quickly add up to half a percentage point or more.
Interest rates move in sync with the economic cycle. When the economy is strong, rates tend to rise as potential homebuyers flock to lenders. When the economy is weak, rates tend to drop as lenders compete for fewer homebuyers.
Here are some historical interest rate data from Freddie Mac and the Federal Home Loan Bank Board's San Francisco district office:
- 30-year fixed-rate mortgage, 1971-present
- 15-year fixed-rate mortgage, 1991-present
- 1-year adjustable-rate mortgage, 1984-present.
- 11th District Cost of Funds Index, 1969-present.
- Understand that a trade-off exists between interest rates and points. Most borrowers pay at least one point when they close on a mortgage loan. One point is equal to 1% of the loan amount. Lenders are usually willing to let you "buy down" the interest rate if you pay more points upfront.
- Calculate your true interest cost. Instead of concentrating on the interest rate, focus on the annual percentage rate (APR) of a mortgage loan. The APR is the true cost of credit and includes your closing costs in the calculation. Under the Truth-in-Lending Act (TILA), lenders are required to disclose the loan's annual percentage rate.
- Consider paying for an interest rate lock. Mortgage lenders generally offer a loan rate that is good for 30 days. This is called an interest rate lock. If you don't close within the 30 days, your rate may change to reflect the lender's change in its cost of funds. If you think rates may rise, you may want to hedge by negotiating a longer rate-lock period, even if you have to pay a fee. On the other hand, if you think rates are headed lower, a rate lock would work to your disadvantage.
Next Topic: Deciding to buy or rent
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