When individuals are shopping different mortgage loan products, one of the major determining factors the borrowers will consider are mortgage rates. Mortgage rates are simply defined as the interest rate borrowers on a mortgage loan will pay for borrowing principal to buy a home. This interest rate can significantly affect the monthly payment and also affects the total amount of interest paid throughout the life of the loan. When applicants qualify for more than one loan, they must consider both the interest rate the loan carries, and the terms of the loan before selecting a loan that suits their needs.

Types of Mortgage Rates and How They Differ

When you start the process of comparing mortgage rates, the first thing that you will notice is that there are two different types of rates you will need to compare: fixed and variable. After the housing market crumbled in 2007, many people feel more comfortable with a fixed rate loan, but that does not mean fixed rate loans are for everyone. The best rate for you depends on your future plans, your goals, and your budget.

One advantage of a fixed rate loan is the fact that the interest rate that is set at the time of origination will remain level for the life of the contract. The rate will not go up or down, even if mortgage rates in the industry change. For individuals who want to know exactly how much they will pay every month, or exactly how much interest will be paid to the mortgagee over the life of the loan, fixed rate loans may be ideal.

Adjustable rate loans, which are also called variable rate loans, differ from fixed loans. While the interest rate may remain level for a specified period of time, the rates can change over time based on the prime rate in the market. You will more than likely receive a lower interest rate initially with an ARM, but if interest rates go up, there is a risk that your mortgage rate will go up as well. It is best to read the fine print of these contracts to see the maximum rate the lender can charge you based on the prime rate.

Mortgage rates tend to vary for purchase loans and refinance loans as well. The value of the home, the area where you are buying, and your credit and financials will all play a role in what rate you receive from lenders. To get an idea of how much you will pay in interest, it is best to apply for a pre-approval. While the pre-approval is not binding, it does help you compare the rates through several lenders so that you know how much you can afford and how much you can expect to pay each month.