When looking for a home loan, odds are you are very interested in the mortgage rate you'll pay, and for a great reason. This can have a meaningful impact on the monthly lease amount you pay.

Prime Rate Explained

The prime rate is the short-term rate charged by a lender for customers most likely to default on loans. Customers with the highest credit scores receive the lowest rate or the best rate that a lender will offer to any customer. Each lending institution has its own prime rate. Major banks almost always have the same rate. Banks can adjust the rate at the same moment, but it does not change on a regular basis.

The Fed Funds rate, which is a short-term rate goal or target rate, is adjusted simultaneously and in correlation with the prime rate.

The posted rate is now an index for many types of loans. The index is used by lenders as their base rate. Lenders then add a margin to make a profit based on the risk associated with the loan. This index is often used to finance consumer loans such as auto loans, credit cards, and home improvement loans.

Points for Mortgage Explained

Mortgage loan transactions can have many costs. One of the closing costs charged by the lender is called 'mortgage points' or just 'points.' One 'point' is the equivalent of 1 percent of the loan amount. Each point costs $1,000 if you borrow $100,000 to buy a house. To obtain a specific rate of interest, these points are charged to the lender. Points can either be paid or negotiated between buyers and sellers.

There Are Also Two Types Of Mortgage Points: Origination Fee And Discount Point

Origination Fees

Lenders charge origination fees to cover the cost of the loan. This is also the lender's income from the loan. You should consult your tax advisor to determine if origination fees are tax-deductible.

Get Discount Points

The lender may also charge discount points at closing. However, these points "buy down" interest rates on mortgage loans. Discount points can be tax-deductible as they are considered prepaid interest. The interest rate will be lower the more discount points are paid. Points charges can be charged by lenders from 0 to as many points as the borrower wants to lower their rate. Usually, it is no more than 3 to 4.