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Rates & Fees Q&A

Understand all the costs of your mortgage.

Should I choose a fixed-rate or adjustable rate mortgage?

The answer mainly depends on how long you expect to stay in your home.

Interest rates on fixed-rate residential home mortgages never change over the life of the loan, no matter how long the term. Fixed rates are preferable if you plan to stay in your home for more than five or seven years. If Massachusetts mortgage interest rates go up, you're protected; if they drop, you can refinance.

Adjustable rate mortgages (ARMs) are pegged to an index such as the variable LIBOR (London Interbank Office Rate) and, therefore, may change upward or downward. You may be able to save on interest costs with an adjustable rate mortgage if you only expect to stay in your home for a few years. For example:

You may find a "5/1" (or 3/1, or other term) ARM with a competitive interest rate.  That rate would stay unchanged for the first five years of your loan (the "5" in "5/1"), then reset every year afterward (the "1" in "5/1"). However, you can't predict whether your rate will reset up or down-or by how much. If you're confident that you'll move  before your rate resets, an ARM may save you money.

By the way, you can also refinance an ARM to a fixed-rate mortgage if rates go down.

How are "interest rate" and "APR" different?

The interest rate (sometimes called the "nominal") is simply the cost to borrow the money for your home purchase.

"APR" stands for "annual percentage rate" and is sometimes called the "effective" or "EAR." APR includes interest as well as many other loan costs, points and fees, and expresses them as an annualized rate.

What are "points?"

One point = one percent of your loan amount. You may wish to pay points at the closing in order to reduce your loan interest rate and lower your expenses over the life of your mortgage.

What is "pre-paid interest?"

Say you close your loan on the 10th of the month. Interest will then accrue between that day and the last day of that month. Rather than assessing you with a larger first monthly payment, your lender will add that accrued interest to your closing costs.

What are "closing costs?"

Your purchase price and mortgage interest are the main costs of buying a home. But to close the sale legally (and to protect interests of everyone involved), the services of many professionals from a variety of fields are necessary. Closing costs cover these services, and they usually total between 3% and 5% of the typical Massachusetts mortgage.

Not all Massachusetts mortgages have the same types of closing costs. Your closing costs may include:

  • Appraisal fees
  • Closing/attorney fees
  • Recording fees
  • Survey fees
  • Investor fees
  • Credit reports
  • Title or tax services
  • Homeowner's insurance
  • Private mortgage insurance
  • Title insurance
  • Escrow fees (fees associated with setting up an account to pay tax and insurance monthly with a mortgage. Escrow accounts are required for any purchase with less than 20% down payment.)
  • Loan origination charges
  • Points (charges for "buying down" your interest rate)

To help you firm up your budget, your home mortgage professional will give you a good faith estimate of your closing costs shortly after you apply formally for your mortgage.

What will my rate be?

In addition to current Massachusetts bank mortgage rates, several factors determine your interest rate:

  • Your credit history
  • Your ability to repay
  • The value of your collateral
  • The loan amount
  • The less of a risk you present, the lower interest rate you can expect.

What will my monthly mortgage payment include?

The answer depends on the terms of your mortgage. One portion of every monthly payment pays down your principal. Another portion (usually larger, especially in the earlier years of your term) goes toward your interest. Every month, you may pay additional money to reduce your principal balance.

Additionally, portions of your mortgage payments may go toward any or all of these costs:

  • Private mortgage insurance (PMI)
  • Homeowner's insurance
  • Property taxes
  • Your mortgage holder may disperse these funds from the escrow account set up with your mortgage.

What is PMI?

If you are putting less than 20% down on your home, you will be required to purchase private mortgage insurance, or PMI. PMI protects your mortgage holder in the event you default on your mortgage. Your PMI premiums are part of your monthly mortgage payment until you have paid down your principal balance to 80% of the selling price of your home. Hint: If you are required to purchase PMI, it pays to add a little extra to your monthly payments in order to reduce principal balance and discontinue PMI sooner.

NEXT: The Mortgage Application Process