Understanding Interest Rates

Interest rates affect your monthly mortgage payment and the total amount you’ll pay over the life of the loan. This guide breaks down common questions about rates, loan terms, and mortgage types so you can make an informed decision.

40-Year Mortgages

A 40-year mortgage reduces your monthly payment by extending the loan term beyond the standard 30 years. The downside is substantial: you’ll pay significantly more in interest over time. For most borrowers, shorter loan terms are more cost-effective in the long run.

Are Interest Rates Negotiable?

Sometimes. Certain lenders may be open to negotiating the interest rate or the number of points, especially smaller or less traditional institutions. Seller-financed deals typically allow more flexibility. Always compare both interest rates and fees when evaluating loan offers.

Seller Financing and Interest Rates

In seller financing, the interest rate is fully negotiable. Sellers usually reference current mortgage rates, including those for second mortgages. Rates may be higher than those from banks, and the loan terms are often shorter—typically 5 to 15 years. However, these loans usually exclude lender fees and points.

Adjustable Rate Mortgages (ARMs)

ARMs offer lower initial rates—often 2–3% lower than fixed-rate loans—but the rate can adjust periodically based on market conditions. ARMs may make sense if:

You plan to move in a few years

You need to qualify with a lower initial payment

You understand and accept the risk of future rate increases

Make sure caps and adjustment terms are clearly stated.

Locking in an Interest Rate

A rate lock secures your mortgage rate for a set period—usually 30 to 60 days—protecting you from market fluctuations during loan processing. Some lenders charge a lock-in fee. If the lock expires before closing, your loan will likely reflect the current market rate at that time.

How ARMs Adjust Over Time

ARMs are tied to financial indices like:

Treasury Bills (T-Bills)

Cost of Funds Index (COFI)

Certificates of Deposit (CDs)

London Inter-Bank Offered Rate (LIBOR)

Adjustments may not align with the index immediately—there is often a lag. ARMs typically include caps to limit how much the rate can change annually or over the life of the loan.

15-Year vs. 30-Year Loans

15-year loans:

Lower total interest paid

Faster equity buildup

Higher monthly payments

30-year loans:

Lower monthly payments

More total interest over time

Slower equity growth

Your choice depends on your financial goals, retirement plans, and monthly budget.

Why Choose a Fixed-Rate Mortgage?

Fixed-rate mortgages provide stability. Your interest rate stays the same over the life of the loan, making it easier to budget long-term. While the rate is typically higher than ARMs initially, you avoid the risk of future increases.

Most buyers prefer fixed-rate loans because they offer:

Predictable monthly payments

No risk of rate hikes

Simpler loan structure

If market rates fall, refinancing is an option.