For example, a loan with an interest rate of 3.1% and fees of $2,100 would have an APR of 3.169%.
When comparing rates from different lenders, look at both the APR and the interest rate. The APR will represent the actual cost over the life of the loan, but you will also need to consider what you are able to pay up front versus over time.
How are mortgage rates set?
Lenders use a number of factors to set rates every day. Each lender’s formula will be a little different, but will take into account the current federal funds rate (a short-term rate set by the Federal Reserve), competitor rates, and even the staff they have to underwrite loans. Your individual qualifications will also impact the rate you will be offered.
In general, rates follow the yields of 10-year Treasury bills. Average mortgage rates are generally about 1.8 percentage points higher than the yield on the 10-year note.
Yields are important because lenders don’t keep the mortgage they issued on their books for long. Instead, in order to free up cash to continue taking out more loans, lenders are selling their mortgages to entities like Freddie Mac and Fannie Mae. These mortgages are then bundled into what are called mortgage-backed securities and sold to investors. Investors will only buy if they can make a little more than they can on government notes.