Home Loans
The interest rate on your mortgage is the single biggest factor in what your home actually costs you over time. Here's how to understand it before you commit.
Mortgage rates don't come from thin air. They're influenced by several overlapping factors: the federal funds rate, Treasury yields, the secondary mortgage market, and the lender's own margin. When you see a headline rate advertised, that number has traveled through all of those layers before it reaches you.
On top of that, your personal rate is adjusted based on your credit score, your down payment size, the property type, the loan term, and whether you're buying or refinancing. Two people applying on the same day with the same lender can get meaningfully different rates.
A fixed rate mortgage locks in your interest rate for the life of the loan. Your principal and interest payment never changes, regardless of what happens in the broader economy. If you close at 6.5%, your rate is 6.5% in year 1 and year 30.
This predictability has real value. It makes budgeting straightforward and protects you if rates rise. The tradeoff is that you won't benefit if rates fall significantly, unless you refinance (which costs money).
An ARM starts with a fixed period, typically 3, 5, 7, or 10 years, and then adjusts periodically based on a market index. A 5/1 ARM means your rate is fixed for five years, then adjusts once per year afterward.
ARMs often start with a lower rate than fixed loans. That lower payment in the early years is real and can matter if you're planning to sell or refinance before the adjustment period starts. The risk is carrying the loan longer than you planned and facing rate adjustments that push your payment significantly higher.
During the 2000s housing boom, many borrowers were put into ARMs they didn't fully understand, with teaser rates that reset dramatically. That pattern is worth knowing, even if today's disclosure requirements are better.
The interest rate you're quoted is not your full cost of borrowing. The APR includes the rate plus fees, and it's the number that matters for comparison. Lenders are required to disclose it, but they don't always lead with it.
Discount points are another area where transparency varies. Paying points upfront lowers your rate. Whether it's worth it depends on how long you hold the loan. Ask your lender to show you the break-even calculation. If they don't offer it, ask for it explicitly.
Private mortgage insurance (PMI) is required on most conventional loans with less than 20% down. It protects the lender, not you, and adds to your monthly payment. Find out exactly when you can cancel it.
Getting quotes from multiple lenders within a 14-45 day window generally counts as a single credit inquiry for scoring purposes, depending on the scoring model. This means you can shop without hurting your credit, as long as you do it in a compressed timeframe.
When comparing offers, use the Loan Estimate form. Every lender must give you one. The format is standardized, so you can line them up side by side and compare total costs directly. Pay attention to closing costs, not just the rate.
For more on borrower rights and required disclosures, see our loan transparency guide. For a deep dive on APR, visit Understanding APR. The blog covers mortgage points and what lenders don't tell you about rates.