INTEREST RATES AND MORTGAGE PROGRAMS
How are interest rates determined?
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth, and Federal Reserve policy. Over time, inflation has the largest influence on the level of interest rates. A modest rate of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates to increase. Our nation's central bank, the Federal Reserve, implements policies designed to keep inflation and interest rates relatively low and stable.
What is an adjustable rate mortgage?
An adjustable rate mortgage, or an "ARM" as they are commonly called, is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade-off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.
Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off. You get a lower rate with an ARM in exchange for assuming more risk.
For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you don't plan on being in the home for more than 7 years.
Here's some detailed information explaining how ARMs work:
Adjustment Period
With most ARMs, the interest rate and monthly payment are fixed for an initial time period, such as seven years. After the initial fixed period, the interest rate can change every year after. The interest rate will not change for the first 7 years (the initial adjustment period) but can change every year after the first 7 years.
Index
Our ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. If the index rate moves up, so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down, your monthly payment may decrease.
Margin
To determine the interest rate on an ARM, we'll add a pre-disclosed amount to the index called the "margin". If you're still shopping, comparing one lender's margin to another's can be more important than comparing the initial interest rate, since it will be used to calculate the interest rate you will pay in the future.
Interest-Rate Caps
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
Periodic or adjustments caps, which limit the interest rate increase from one adjustment period to the next.
Overall or lifetime caps, which limit the interest rate increase over the life of the loan.
As you can imagine, interest rate caps are very important, since no one knows what can happen in the future. All the ARMs we offer have both adjustment and lifetime caps. Please see each product description for full details.
Negative Amortization
"Negative Amortization" occurs when your monthly payment changes are less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. None of the ARMs we offer allow for negative amortization.
Prepayment Penalties
Some lenders may require you to pay special fees or penalties, if you pay off the ARM early. Our current ARM products do not contain any prepayment penalty.
Is comparing APRs the best way to decide which lender has the lowest rates and fees?
The Federal Truth in Lending Act requires all financial institutions disclose the Annual Percentage Rate (APR) when they advertise a rate. The APR is designed to present the actual cost of obtaining financing, by requiring that some of the closing fees charged at closing be included, in addition to the interest rate, to determine the cost of financing over the full term of the loan.
For adjustable rate mortgages, the APR can be complex. Since no one knows exactly what market conditions will be in the future, assumptions must be made regarding future rate adjustments.
You can use the APR as a guideline to shop for loans, but you should not depend solely on the APR in choosing the loan program that's best for you. Also, the APR doesn't include all the closing costs. Look at total fees, possible rate adjustments in the future if you are comparing adjustable rate mortgages, and consider the length of time that you plan on having the mortgage.
Don't forget the APR is an effective interest rate - not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow, and the term of your loan.
If you would like additional information, you may want to see the Your Home Loan Toolkit - A Step-by-Step Guide provided, or by calling 1-888-8CAPFED.
How do I know if it's best to lock in my interest rate or to let it float?
Mortgage interest rate movements are as hard to predict as the stock market, and no one can really know for certain whether they'll go up or down.
If you have a hunch rates are on an upward trend then you'll want to consider locking the rate as soon as you are able. Before you decide to lock, make sure your loan can close within the lock in period. It won't do any good to lock your rate if you can't close during the rate lock period. If you're purchasing a home, review your contract for the estimated closing date to help you choose the right rate lock period. If you are refinancing, in most cases, your loan could close within 60 days. However, if you have any secondary financing on the home that won't be paid off, allow some extra time, since we'll need to contact that lender to get their permission. Please review our Rate Lock Policy for details, including applicable Rate Lock Fees.
If you think rates might drop while your loan is being processed, you may wish to take a risk and let your rate "float" instead of locking. How much money will I save by choosing a 15-year loan rather than a 30-year loan?
A 15-year fixed rate mortgage gives you the ability to own your home free and clear in 15 years. And, while the monthly payments are somewhat higher than a 30-year loan, the interest rate on the 15-year mortgage is usually a little lower, and more importantly - you'll pay less than half the total interest cost of the traditional 30-year mortgage. However, if you can't afford the higher monthly payment of a 15-year mortgage, don't feel alone. Many borrowers find the higher payment out of reach and choose a 30-year mortgage.
It still makes sense to use a 30-year mortgage for most people.
Who should consider a 15-Year Mortgage?
The 15-year fixed rate mortgage is popular with young homebuyers with sufficient income to meet the higher monthly payments to pay off the house before their children start college. Other homebuyers, who are more established in their careers, have higher incomes and have the desire to own their homes before they retire, may also prefer this mortgage.
Advantages and Disadvantages of a 15-Year Mortgage
The 15-year fixed rate mortgage offers two big advantages for most borrowers:
Should I pay discount points in exchange for a lower interest rate?
Discount points are considered a form of interest. Each point is equal to one percent of the loan amount. You pay them up front at your loan closing in exchange for a lower interest rate over the life of your loan. This means more money will be required at closing, however you will have lower monthly payments over the term of your loan.
To determine whether it makes sense for you to pay discount points, you should compare the cost of the discount points to the monthly payments savings created by the lower interest rate. Divide the total cost of the discount points by the savings in each monthly payment. This calculation provides the number of payments you'll make before you actually begin to save money by paying discount points. If the number of months it will take to recoup the discount points is longer than you plan on having this mortgage, you should consider a loan program option that doesn't require discount points to be paid.
RATE LOCK POLICIES
First Mortgage Loan Products
The interest rate market is subject to movements without advance notice. Locking in a rate protects you from rising interest rates from the day your rate is locked until the day your lock period expires.
You will have the opportunity to either lock or float the interest rate at the end of the application process before you submit your application. If you do not want to lock your interest rate at the time of application, you may choose to float the interest rate up to 15 days prior to closing for no fee. Please talk to one of our Mortgage Loan Professionals for more information regarding our rate lock options and fees.
PREPAYMENT PENALTIES
Are there any prepayment penalties charged for these loan programs?
None of the loan programs offered by us have penalties for prepayment. You can pay off your mortgage anytime with no additional charges.
HOME EQUITY POLICIES
What is your home equity line of credit and home equity loan lock policy?
The interest rate market is subject to movements without advance notice. Because our home equity line of credit interest rate is based on an index, the interest rate will change anytime the value of the index changes – whether your loan has closed or not. If you apply for a fixed rate home equity loan your interest rate will be locked at the rate as of the date of application, provided the loan closes in a reasonable period of time.
CLOSING FEES
Fees
A home loan often involves many fees, such as the appraisal fee, title charges, closing fees and state or local taxes. These fees vary from state to state and also from lender to lender. Any lender or broker should be able to give you an estimate of their fees, but it is more difficult to tell which lenders have done their homework and are providing a complete and accurate estimate. We've completed the research necessary to make sure our fee quotes are accurate to the city level.
To assist you in evaluating Capitol Federal's fees, we've grouped them as follows:
Third Party Fees
Fees we consider third party fees include the appraisal fee, the credit report fee, the survey fee, title insurance fees, flood certification fees, and courier/mailing fees. Third party fees are fees we'll collect and pass on to the person who actually performed the service. For example, an appraiser is paid the appraisal fee, a credit bureau is paid the credit report fee and a title company or an attorney is paid the title insurance fees. Typically, you'll see some minor variances in third party fees from lender to lender, since a lender may have negotiated a special charge from a provider they use often.
Taxes and other Unavoidable Costs
Fees we consider to be taxes and other unavoidable costs include: State/Local Taxes and recording fees. These fees will most likely have to be paid regardless of the lender you choose. If some lenders don't quote you fees that include taxes and other unavoidable fees, don't assume you won't have to pay them. It probably means the lender who doesn't tell you about the fee hasn't done the research necessary to provide accurate closing costs.
Lender Fees
Fees such as discount points, origination fees, non-escrow fees, rate lock, closing and underwriting fees are retained by the lender. This is the category of fees you should compare very closely from lender to lender before making a decision.
Required Advances
You may be asked to prepay some items at closing that will actually be due in the future. These fees are sometimes referred to as prepaid items.
One of the more common required advances is called "per diem interest" or "interest due at closing". You will pay interest from the date of closing through the interest due date. For example, if the loan is closed on June 15, and you have chosen to have your payments on the 1st of the month, we'll collect interest from June 15 through July 1st at closing. This also means you won't make your first mortgage payment until August 1st. This type of charge should not vary from lender to lender, and does not need to be considered when comparing lenders. All lenders will charge you interest beginning on the day the loan funds are disbursed; it is simply a matter of when it will be collected.
If an escrow or impound account will be established, you will make an initial deposit into the escrow account at closing so that sufficient funds are available to pay the bills when they become due.
If your loan requires mortgage insurance, the first month or so of the mortgage insurance will be collected at closing. Whether or not you must purchase mortgage insurance depends on the size of the down payment you make. The upfront insurance premium will be collected at your loan closing and the monthly premium will be included in your monthly payment. If your loan is a purchase, you'll also need to pay for your first year's homeowners insurance premium prior to closing. We consider this to also be a required advance.
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How are interest rates determined?
Interest rates fluctuate based on a variety of factors, including inflation, the pace of economic growth, and Federal Reserve policy. Over time, inflation has the largest influence on the level of interest rates. A modest rate of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates to increase. Our nation's central bank, the Federal Reserve, implements policies designed to keep inflation and interest rates relatively low and stable.
What is an adjustable rate mortgage?
An adjustable rate mortgage, or an "ARM" as they are commonly called, is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade-off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.
Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off. You get a lower rate with an ARM in exchange for assuming more risk.
For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you don't plan on being in the home for more than 7 years.
Here's some detailed information explaining how ARMs work:
Adjustment Period
With most ARMs, the interest rate and monthly payment are fixed for an initial time period, such as seven years. After the initial fixed period, the interest rate can change every year after. The interest rate will not change for the first 7 years (the initial adjustment period) but can change every year after the first 7 years.
Index
Our ARM interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. If the index rate moves up, so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down, your monthly payment may decrease.
Margin
To determine the interest rate on an ARM, we'll add a pre-disclosed amount to the index called the "margin". If you're still shopping, comparing one lender's margin to another's can be more important than comparing the initial interest rate, since it will be used to calculate the interest rate you will pay in the future.
Interest-Rate Caps
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:
Periodic or adjustments caps, which limit the interest rate increase from one adjustment period to the next.
Overall or lifetime caps, which limit the interest rate increase over the life of the loan.
As you can imagine, interest rate caps are very important, since no one knows what can happen in the future. All the ARMs we offer have both adjustment and lifetime caps. Please see each product description for full details.
Negative Amortization
"Negative Amortization" occurs when your monthly payment changes are less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. None of the ARMs we offer allow for negative amortization.
Prepayment Penalties
Some lenders may require you to pay special fees or penalties, if you pay off the ARM early. Our current ARM products do not contain any prepayment penalty.
Is comparing APRs the best way to decide which lender has the lowest rates and fees?
The Federal Truth in Lending Act requires all financial institutions disclose the Annual Percentage Rate (APR) when they advertise a rate. The APR is designed to present the actual cost of obtaining financing, by requiring that some of the closing fees charged at closing be included, in addition to the interest rate, to determine the cost of financing over the full term of the loan.
For adjustable rate mortgages, the APR can be complex. Since no one knows exactly what market conditions will be in the future, assumptions must be made regarding future rate adjustments.
You can use the APR as a guideline to shop for loans, but you should not depend solely on the APR in choosing the loan program that's best for you. Also, the APR doesn't include all the closing costs. Look at total fees, possible rate adjustments in the future if you are comparing adjustable rate mortgages, and consider the length of time that you plan on having the mortgage.
Don't forget the APR is an effective interest rate - not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow, and the term of your loan.
If you would like additional information, you may want to see the Your Home Loan Toolkit - A Step-by-Step Guide provided, or by calling 1-888-8CAPFED.
How do I know if it's best to lock in my interest rate or to let it float?
Mortgage interest rate movements are as hard to predict as the stock market, and no one can really know for certain whether they'll go up or down.
If you have a hunch rates are on an upward trend then you'll want to consider locking the rate as soon as you are able. Before you decide to lock, make sure your loan can close within the lock in period. It won't do any good to lock your rate if you can't close during the rate lock period. If you're purchasing a home, review your contract for the estimated closing date to help you choose the right rate lock period. If you are refinancing, in most cases, your loan could close within 60 days. However, if you have any secondary financing on the home that won't be paid off, allow some extra time, since we'll need to contact that lender to get their permission. Please review our Rate Lock Policy for details, including applicable Rate Lock Fees.
If you think rates might drop while your loan is being processed, you may wish to take a risk and let your rate "float" instead of locking. How much money will I save by choosing a 15-year loan rather than a 30-year loan?
A 15-year fixed rate mortgage gives you the ability to own your home free and clear in 15 years. And, while the monthly payments are somewhat higher than a 30-year loan, the interest rate on the 15-year mortgage is usually a little lower, and more importantly - you'll pay less than half the total interest cost of the traditional 30-year mortgage. However, if you can't afford the higher monthly payment of a 15-year mortgage, don't feel alone. Many borrowers find the higher payment out of reach and choose a 30-year mortgage.
It still makes sense to use a 30-year mortgage for most people.
Who should consider a 15-Year Mortgage?
The 15-year fixed rate mortgage is popular with young homebuyers with sufficient income to meet the higher monthly payments to pay off the house before their children start college. Other homebuyers, who are more established in their careers, have higher incomes and have the desire to own their homes before they retire, may also prefer this mortgage.
Advantages and Disadvantages of a 15-Year Mortgage
The 15-year fixed rate mortgage offers two big advantages for most borrowers:
- You own your home in half the time it would take with a traditional 30-year mortgage.
- You save more than half the amount of interest of a 30-year mortgage. Lenders usually offer this mortgage at a slightly lower interest rate than with 30-year loans - typically up to .5% lower.
- The monthly payments for this type of loan are roughly 10 percent to 15 percent higher per month than the payment for a 30-year.
- Because you'll pay less total interest on the 15-year fixed rate mortgage, you won't have the maximum mortgage interest tax deduction possible.
- You may be better off, in the long run, by investing the extra amount you are applying towards your monthly mortgage payment in other investments.
Should I pay discount points in exchange for a lower interest rate?
Discount points are considered a form of interest. Each point is equal to one percent of the loan amount. You pay them up front at your loan closing in exchange for a lower interest rate over the life of your loan. This means more money will be required at closing, however you will have lower monthly payments over the term of your loan.
To determine whether it makes sense for you to pay discount points, you should compare the cost of the discount points to the monthly payments savings created by the lower interest rate. Divide the total cost of the discount points by the savings in each monthly payment. This calculation provides the number of payments you'll make before you actually begin to save money by paying discount points. If the number of months it will take to recoup the discount points is longer than you plan on having this mortgage, you should consider a loan program option that doesn't require discount points to be paid.
RATE LOCK POLICIES
First Mortgage Loan Products
The interest rate market is subject to movements without advance notice. Locking in a rate protects you from rising interest rates from the day your rate is locked until the day your lock period expires.
You will have the opportunity to either lock or float the interest rate at the end of the application process before you submit your application. If you do not want to lock your interest rate at the time of application, you may choose to float the interest rate up to 15 days prior to closing for no fee. Please talk to one of our Mortgage Loan Professionals for more information regarding our rate lock options and fees.
PREPAYMENT PENALTIES
Are there any prepayment penalties charged for these loan programs?
None of the loan programs offered by us have penalties for prepayment. You can pay off your mortgage anytime with no additional charges.
HOME EQUITY POLICIES
What is your home equity line of credit and home equity loan lock policy?
The interest rate market is subject to movements without advance notice. Because our home equity line of credit interest rate is based on an index, the interest rate will change anytime the value of the index changes – whether your loan has closed or not. If you apply for a fixed rate home equity loan your interest rate will be locked at the rate as of the date of application, provided the loan closes in a reasonable period of time.
CLOSING FEES
Fees
A home loan often involves many fees, such as the appraisal fee, title charges, closing fees and state or local taxes. These fees vary from state to state and also from lender to lender. Any lender or broker should be able to give you an estimate of their fees, but it is more difficult to tell which lenders have done their homework and are providing a complete and accurate estimate. We've completed the research necessary to make sure our fee quotes are accurate to the city level.
To assist you in evaluating Capitol Federal's fees, we've grouped them as follows:
Third Party Fees
Fees we consider third party fees include the appraisal fee, the credit report fee, the survey fee, title insurance fees, flood certification fees, and courier/mailing fees. Third party fees are fees we'll collect and pass on to the person who actually performed the service. For example, an appraiser is paid the appraisal fee, a credit bureau is paid the credit report fee and a title company or an attorney is paid the title insurance fees. Typically, you'll see some minor variances in third party fees from lender to lender, since a lender may have negotiated a special charge from a provider they use often.
Taxes and other Unavoidable Costs
Fees we consider to be taxes and other unavoidable costs include: State/Local Taxes and recording fees. These fees will most likely have to be paid regardless of the lender you choose. If some lenders don't quote you fees that include taxes and other unavoidable fees, don't assume you won't have to pay them. It probably means the lender who doesn't tell you about the fee hasn't done the research necessary to provide accurate closing costs.
Lender Fees
Fees such as discount points, origination fees, non-escrow fees, rate lock, closing and underwriting fees are retained by the lender. This is the category of fees you should compare very closely from lender to lender before making a decision.
Required Advances
You may be asked to prepay some items at closing that will actually be due in the future. These fees are sometimes referred to as prepaid items.
One of the more common required advances is called "per diem interest" or "interest due at closing". You will pay interest from the date of closing through the interest due date. For example, if the loan is closed on June 15, and you have chosen to have your payments on the 1st of the month, we'll collect interest from June 15 through July 1st at closing. This also means you won't make your first mortgage payment until August 1st. This type of charge should not vary from lender to lender, and does not need to be considered when comparing lenders. All lenders will charge you interest beginning on the day the loan funds are disbursed; it is simply a matter of when it will be collected.
If an escrow or impound account will be established, you will make an initial deposit into the escrow account at closing so that sufficient funds are available to pay the bills when they become due.
If your loan requires mortgage insurance, the first month or so of the mortgage insurance will be collected at closing. Whether or not you must purchase mortgage insurance depends on the size of the down payment you make. The upfront insurance premium will be collected at your loan closing and the monthly premium will be included in your monthly payment. If your loan is a purchase, you'll also need to pay for your first year's homeowners insurance premium prior to closing. We consider this to also be a required advance.
Back to Mortgage Help Center Back to Top
