Mortgage rates tell you how much it will cost you to borrow money to buy or refinance a home. That cost comes in the form of interest. The higher the rate, the more interest you will pay over the course of the loan. When you're shopping for a mortgage, you want to find the lowest rate--but you need to know the terminology so you know what you're getting.
Interest
Mortgage lenders make money by charging interest. Say you take out a 30-year mortgage for $200,000 at six percent interest. Over the course of the loan, you pay back a total of about $430,000--the original loan amount, known as the "principal," plus $230,000 in interest. Even relatively small differences in rates have a big impact: borrow the same amount at 6.25 percent, and you'll pay an additional $13,000 in interest over the life of the loan.
Interest Rate
Every mortgage that you see advertised will have two stated rates: the interest rate and the APR. The interest rate is simply the rate that is charged on the principal, and it is this rate that determines the amount of your monthly payment. Mortgages are usually amortized, meaning that when you take out the loan, the total amount of interest is calculated upfront. That interest amount is then combined with the principal, and the total is divided equally by the number of months in the loan term.
APR
Interest on the principal isn't the only cost of taking out a mortgage, however. Most mortgages also come with costs that have to be paid upfront, such as origination fees or broker fees. Federal law requires that lenders disclose the "true" cost of the mortgage by including these fees in a separate calculation called annual percentage rate (APR). The APR tells you what rate you'd be paying if those fees were charged as interest over the course of the loan rather than paid upfront.
APR exists to help you compare loan products, and to serve as a red flag if it's substantially different from the stated interest rate. But it doesn't affect your monthly payment; that's determined solely by the interest rate.
Fixed
The interest rate on your mortgage is either fixed or adjustable. Conventional mortgages have fixed rates: the rate won't change for the duration of the loan term, so your monthly payment won't change either. This gives you the ability to predict your expenses and protects you from rising interest rates, but it can also leave you paying too much if interest rates fall.
Adjustable
In an adjustable-rate mortgage (ARM), the rate fluctuates according to conditions in credit markets. ARMs often have a low initial "teaser" rate that lasts for one or two years before adjustments begin. ARMs commonly adjust every six or 12 months. Every time the rate adjusts, so will your monthly payment. ARMs allow you to take advantage of falling interest rates, but they also leave you vulnerable to sharp increases, and they limit your ability to plan your expenses.
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