Breaking Down Mortgage Rates and Costs

Published March 1, 2018
John Moffatt
by John Moffatt

Getting ready to buy your dream home? Whether you’ve already started doing your research or aren’t quite sure where to begin, we’re here to help you get home. We’ve taken our best homebuying guidance and broken it up into bite-size to-dos.

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Chances are you want to get a good deal on your mortgage. But what does that really mean? This post is all about breaking down mortgage rates and costs, so you can be a savvy shopper.

Your to-do list:

  • Get to know mortgage costs

  • Understand how rates work

  • Learn about locking a rate

Get to know mortgage costs

Getting a mortgage requires more cash than just your down payment. Closing costs can add thousands of dollars to your total upfront costs, and are typically around 2-5% of the purchase price of the home. Some closing costs are charged by the lender, but most are third-party fees associated with finalizing the purchase, confirming your legal ownership of the home, and prepaying property taxes and insurance.

Let’s take a quick look at what your closing costs may include:

  • Fees associated with your rate: if you choose to pay “points” up front in exchange for a lower monthly rate
  • Lender fees: sometimes called underwriting, application, servicing, or origination fees. (Better does not charge lender fees.)
  • Third-party fees needed to finalize your loan: includes appraising the home value, getting a flood certification, and getting your credit report
  • Title and recording fees: these are fees related to ensuring you have a legal claim to your home and recording your status as the owner with the government
  • Prepaids: these are fees that will be part of your monthly mortgage bill, some of which you are required to “prepay” at closing. They can include property taxes, homeowners insurance, mortgage insurance (if you put less than 20% down), and interest.

A lender is required to give you an official Loan Estimate, which includes a breakdown of all of your estimated closing costs. Getting Loan Estimates from different lenders can help you to compare apples-to-apples when you’re shopping around. Get a quick guide to Loan Estimates here and learn more about the cost of a mortgage here.

Understand how rates work

There are actually quite a few factors that go into determining the mortgage rates that will be available to you. There’s the economic climate, your financial details (especially your credit score), the details of your property and loan, and the pricing a lender can offer based on all those factors. An important thing to remember is that you have control over your rate, too. You can “buy” a lower rate by paying a lender more up front in the form of prepaid interest called “points.” Or you can take lender “credits” to lower your closing costs, in exchange for a higher rate. For a more detailed overview of the factors that go into determining your rate, read this post.

Learn about locking a rate

Since interest rates can fluctuate daily based on how the market is doing, locking your rate protects you from these fluctuations going forward. When you lock your rate, your lender will commit to honoring that day’s rate options, even if rates go up later. Locking your rate is the first step to starting the loan process. You can lock your rate once you have a signed purchase contract for your new property, and you’ve given us some basic information about your income and authorized a hard credit pull.

Locking a rate may seem final, but there are still quite a few things you can do once you’ve locked, such as changing your loan type, choosing to pay points or take credits, making changes to your application, or taking advantage of market changes (this is sometimes called a “float down” option). You can learn more about locking a rate here.

See your next to-dos:

See your past to-dos:

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