The difference between APR and interest rate is that the APR, or annual percentage rate, represents the total cost of the loan, including the interest rate and all fees and points. The interest rate is the amount of interest the lender will charge you for the loan, not including any of the other costs.

Here’s what’s often included in the APR:

• Interest rate: This is simply the percentage rate of interest charged for the mortgage.
• Points: A point is an upfront fee you might choose to pay to lower your interest rate. Each point, also known as a discount point, costs 1 percent of the mortgage amount. One point on a $300,000 mortgage, for example, would cost you $3,000 upfront.
• Origination fee: This is a fee — one of many closing costs — many lenders charge for creating or initiating your loan.
• Mortgage broker fees: If you’re working with a mortgage broker on your loan, you won’t pay them directly; rather, they charge the lender for their services. The lender then passes the cost onto you in the APR on your loan.

The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t drive mortgage rates as directly as they do other products, such as savings accounts and CD rates. However, the Fed does set the overall tone for borrowing costs. The central bank’s federal funds rate can influence 10-year Treasury bond yields, the benchmark for 30-year mortgage rates.

To sum up: The Fed does not directly set mortgage rates, but its policies influence the financial markets and investors that dictate how these rates move.

Learn more about how the Federal Reserve affects mortgage rates.

There are many different types of mortgages, broadly put into three buckets:

• Conventional: In simplest terms, a conventional loan is a mortgage that isn’t guaranteed by a government agency. Most conventional loans are conforming loans, however, meaning they’re bought by mortgage giants Fannie Mae or Freddie Mac. They are the most popular type of mortgage in the U.S.
• Government-insured: The Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) guarantee loan programs aimed at borrowers who meet certain criteria.
• Jumbo loans: Also known as non-conforming mortgages, jumbo loans are for amounts higher than the conforming loan limit. For 2023, that threshold is $726,200 in most of the country, and $1,089,300 in high-cost areas.

There are also different loan terms within these categories, such as 15 years or 30 years, and different interest rate structures, generally either fixed or adjustable (also known as variable).

There are several pieces to getting a mortgage (check out Bankrate’s step-by-step guide to getting a mortgage for more). Here’s a quick overview:

Step 1: Strengthen your credit. A strong credit score (in the 700s, preferably) qualifies you for the best possible deal. If your credit score is on the lower side, you could still get a loan, but you’ll likely pay a higher interest rate.

Step 2: Know what you can afford. Rising interest rates make monthly mortgage payments even higher, so you might have to adjust your expectations (if not your budget) to find an affordable home.

Step 3: Build your savings. Your first savings goal should be to amass enough for a down payment — but you also should build up your cash reserves for expenses like closing costs, moving, furniture and repairs.

Step 4: Compare mortgage rates and loan types. Once your credit score and savings are in an adequate place, start searching for the right kind of mortgage for your situation.

Step 5: Find a mortgage lender. Once you’ve decided on the type of mortgage, it’s time to find a mortgage lender. Consider traditional lenders such as banks and credit unions, non-bank lenders and mortgage brokers.

Step 6: Get preapproved for a loan. For a preapproval, the lender reviews your finances to determine if you’re eligible for funding and an amount they’re willing to lend you.

Step 7: Begin house-hunting. With preapproval in hand, you can search for a property that meets your needs. When you find a home that has the perfect blend of affordability and livability, be ready to pounce.

Step 8: Submit your loan application. If you’ve found the home you want, you’re ready to complete a mortgage application. Most applications can be done online, but it can sometimes be more efficient to apply with a loan officer in person or over the phone.

Step 9: Wait out the underwriting process. Even though you’ve been preapproved for a loan, that doesn’t mean you’ll ultimately get financing from the lender. The final decision will come from the lender’s underwriting department, which evaluates the risk of each prospective borrower and property and determines the loan amount, interest rate and other terms.

Step 10: Close on your new home. Once you’ve been officially approved for a mortgage, you’re nearing the finish line. All that’s needed at that point is to complete the closing.

Mortgage lenders come in all shapes and sizes, from online companies to brick-and-mortar banks — and some are a mix of both. Decide what type of service and access you want from a lender and balance that with how competitive their rates are. You might decide that getting the lowest rate is the most important factor for you, while others might go with a slightly higher rate because they can apply in person, for example. Some banks offer discounts to existing customers, so you might be able to save money by getting a loan where your savings account or checking account is.

If your credit is a bit tarnished, many lenders offer loans with lower down payment and credit requirements through the FHA. Veterans might find VA mortgages especially attractive.

Learn more about how to find the best mortgage lender.

Mortgage points, also referred to as discount points, help homebuyers reduce their monthly mortgage payments and interest rates. A mortgage point is most often paid before the start of the loan period, usually during the closing process. It's a type of prepaid interest made on the loan. Each mortgage point typically lowers an interest rate by 0.25 percentage points. For example, one point would lower a mortgage rate of 6 percent to 5.75 percent.

The cost of a point depends on the value of the borrowed money, but it's generally 1 percent of the total amount borrowed to buy the home.

Buying points upfront can help you save money in interest over the life of your loan, but doing so also raises your closing costs. It can make sense for buyers with more disposable cash, but if high closing costs will prevent you from securing your loan, buying points might not be the right move.

A mortgage rate lock freezes the interest rate while you shop for a home. The lender guarantees (with a few exceptions) that the mortgage rate offered to a borrower will remain available to that borrower for a stated period of time. With a lock, the borrower doesn’t have to worry if rates go up between the time they submit an offer and when they close on the home.

Most lenders offer a 30- to 45-day rate lock free of charge. This means if the interest rate increases before your loan closes, you get the stated rate. However, if rates fall, you won’t benefit unless you restart the loan process, a costly and time-consuming endeavor.

Although some lenders offer a free rate lock for a specified period, after that period they might charge fees for extending the lock.

A mortgage is a loan from a bank or other financial institution that helps a borrower purchase a home. The collateral for the mortgage is the home itself. That means if the borrower doesn’t make monthly payments to the lender and defaults on the loan, the lender can sell the home and recoup its money. A mortgage loan is typically a long-term debt taken out for 30, 20 or 15 years. Over this time (known as the loan’s “term”), you’ll repay both the amount you borrowed as well as the interest charged for the loan. Learn more in Bankrate’s guide to mortgage basics.

The closing costs on a mortgage encompass all of the fees associated with the loan, including the lender’s charges, typically an origination fee often equal to 1 percent of the loan principal and optional points. Closing costs also include third-party fees like the cost of an appraisal and title insurance. All together, these usually run anywhere from 2 percent to 5 percent of the amount you’re borrowing, above and beyond your down payment.