Interest Rate vs. APR (The Big One)
This is where most people get tricked.
Interest Rate
The cost of borrowing the principal loan amount. This determines your monthly principal & interest payment.
APR (Annual Percentage Rate)
The interest rate PLUS all the fees, points, and costs rolled into one percentage.
Always compare the APR to see the true cost of the loan. If Lender A has a lower rate but higher APR than Lender B, Lender A is charging you high fees up front to "buy" that rate.
A 0.5% difference in interest rate on a $350,000 home is roughly $115/month. Over 30 years, that is $41,000. Fighting for that half a percent is worth your time.
What are "Points"?
Discount Points are fees you pay upfront (at closing) to lower your interest rate for the life of the loan. One "point" usually costs 1% of the loan amount ($3,500 on a $350k loan) and lowers your rate by about 0.25%.
Should you buy points?
Only if you plan to stay in the home for 7+ years. It takes a long time to "break even" on that upfront cost via monthly savings.
Break-Even Analysis
If you pay $3,500 for points and save $50/month, it takes 70 months (almost 6 years) just to break even. If you sell or refinance before that, you lose money.
Rate Lock
Interest rates change daily (sometimes hourly). A Rate Lock guarantees your rate for a specific period (usually 30-45 days) while you close. If rates go up, you're safe. If they go down, you usually stay at your locked rate unless you have a "float down" option.
Lock your rate when you have a signed purchase agreement and a realistic closing date. Locking too early can cost you extension fees if your closing gets delayed.
Rate Myths
❌ MYTH: "I should wait for rates to drop back to 3%."
✅ TRUTH: 3% was a historical anomaly.
Historically, mortgage rates average around 6-7%. The 3% rates of 2020-2021 were due to a global pandemic and economic crash. Don't base your life plans on a once-in-a-lifetime event happening again soon.
❌ MYTH: "15-year mortgages are always better."
✅ TRUTH: They save interest, but kill cash flow.
Yes, you pay less interest over time with a 15-year loan. But your monthly payment will be roughly 50% higher. For many first-time buyers, the flexibility of a 30-year payment (which you can pay extra on if you want!) is safer.