Rates, terms and points

Fixed or adjustable

With a fixed-rate mortgage, the CFPB explains, the rate is set when you take the loan and does not change. With an adjustable-rate mortgage, the rate can go up or down after an initial period that may last months or years. When it adjusts, the new rate is an index plus a margin, limited by any caps in the loan. The CFPB's warning is worth repeating: do not assume you will be able to sell or refinance before the rate changes, because values and your finances can change too.

An ARM can make sense for a buyer who expects to move before the first reset and who could afford the payment at the cap if plans change. The fixed-versus-adjustable guide shows how to run that test.

Fifteen, twenty or thirty years

A shorter term usually brings a lower rate and much less total interest, but a higher monthly payment. A longer term lowers the payment and keeps more room in the monthly budget, at the cost of more interest. One middle path is a 30-year loan with voluntary extra payments when money allows, which keeps the flexibility to stop if money gets tight. Check that the loan has no prepayment penalty first. The term guide compares the arithmetic side by side.

APR, points and credits

The Loan Estimate shows both the interest rate and the annual percentage rate. APR folds in certain fees, so it helps you compare loans with different fee structures over the full term. Discount points are fees you pay to lower the rate; lender credits do the reverse, raising the rate in exchange for help with closing costs. Neither is good or bad on its own. What matters is the break-even month and how long you expect to keep the loan.

Comparing quotes fairly

Rates change daily, so ask every lender for a Loan Estimate on the same day, for the same loan amount, term, loan type and lock period. Then compare four things: the interest rate, the points and lender fees in section A on page 2, the APR on page 3, and what you will have paid after five years. When one offer is much lower, check whether it includes points. Decide how long you realistically expect to keep the loan, because that decides whether paying points makes sense. The guides on 15-year versus 30-year terms and on APR versus rate include calculators for both comparisons.

Buydowns, locks and shopping

A lower rate can come from several places, and each has a different cost. Discount points lower the rate for the life of the loan in exchange for cash at closing. A temporary buydown lowers the payment for the first year or two only, funded up front, often by a seller or builder; you still have to afford the full payment when it ends. Lender credits work the other way, trading a higher rate for lower closing costs. To compare these fairly, get Loan Estimates for the same loan on the same day and add up what each would cost over the years you expect to keep it, since a quote that wins over three years can lose over ten. Once you choose, check the top of page 1 of the Loan Estimate to see whether and for how long the rate is locked, and ask what an extension would cost if closing slips.

How to use this file

Start with the fixed-versus-adjustable guide, which includes a reset calculator. Then use the term, APR, points and amortization guides. Once you have a preferred lender, the site's long read on rate locks explains how to protect the rate you choose while you close.