Understanding FHA Loan Rates

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The one thing most borrowers ask about right away is the interest rate. It affects your payment and how much your loan costs overall – so it’s an important number.

FHA loan rates have a lot of misconceptions, though, which I hope to dispel here, helping you understand the truth about FHA interest rates in Colorado.

FHA Loan Rates Change Daily

FHA loan rates change daily, and sometimes even more often. Once you have a loan in process and a sales contract executed, we can talk about locking your interest rate. Since rates change based on the market fluctuations, you can imagine how much they change. In general, FHA loan rates fluctuate based on the economy’s status, supply and demand, and the 10-year Treasury bond yield.

There’s no way to predict the FHA interest rates, but you can use historical values to see patterns should you want more information.

When you’re ready, we’ll lock in your interest rate. Once you lock it, the rate is your rate for the life of the loan. The market can go up or down and it doesn’t affect your loan rate even before you close. Rates may change dramatically or have small changes from day-to-day. You may lock your interest rate in for 30, 45, or 60 days in most cases.

We’ll discuss the right length based on your sales contract and underwriting status, as well as the fees involved in locking the rate.

The Types of FHA Loan Rates

FHA borrowers have two options – fixed-rates and adjustable rates.

• Fixed-rate FHA loans have one interest rate for the loan’s term. Let’s say you lock in a 4 percent interest rate today on a 30-year loan. If you don’t refinance and/or pay the loan off, you’ll pay 4 percent for the loan’s term. In exchange for protection from the market’s volatility, lenders charge slightly higher rates for fixed-rate mortgages than adjustable rate mortgages.
• Adjustable rate mortgages (ARMS) have two phases. The first is the introductory phase. The initial interest rate or teaser rate is often lower than the fixed-rate loan. This rate is fixed for the initial period, such as 3, 5, or 7 years. After the fixed period expires, the rate adjusts annually based on the chosen index (such as LIBOR) and the predetermined margin. Your ARM rate adjusts on the anniversary date each year, using the current index value plus the margin.

Buying your FHA Interest Rate Down

If you want a lower rate than what’s offered, you may ‘buy it down’ with discount points. You pay points upfront as closing costs, which is prepaid interest. Rather than spreading the interest out over the loan’s lifetime, you pay it upfront and in exchange, get lower monthly payments.

Each lender sets their own ‘discount’ for each point. If you want to buy your rate down, we’ll discuss your options, determining which makes the most financial sense today and long-term based on your financial and real estate goals.

The FHA Loan Rates and APR

You’ll hear two rates when you apply for an FHA loan in Colorado – the interest rate and APR. They are similar, but not the same thing.

The interest rate is the fee the lender charges to borrow the funds. The APR is a measure of the full cost of the loan including the fees incurred. The APR shows you what a loan costs annually, and gives you a better idea of which loan offers the best deal, especially when comparing loans with and without discount or origination points.

I know FHA loan rates can be confusing, but I work closely with my clients, helping them understand their options. We’ll go over the big picture – ensuring you understand how FHA interest rates affect your monthly payment as well as the loan’s overall cost.

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