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Step 3: Picking Rates & Cost of Borrowing

At first, making sense of interest rates, points and cost of borrowing can be daunting. But it doesn't need to be. Like choosing the right loan type, it's all about choosing the down payment and monthly payment that fits your needs and lifestyle.

 See How Your Interest Rate Affects Your Payment
The interest rate on a loan is used to calculate your monthly payment. The higher the interest rate, the higher your monthly payment. The lower the interest rate, the lower your monthly payment. Use the What will my monthly payment be? calculator to see how this works.

 Know When to Lock
If you're afraid rates are headed up, protect your buying power by locking in the rate at the time you apply for your loan.

What should you look for in a rate lock? Make sure it allows enough time for your loan to be processed. This is important because some lenders offer rate protection for just a week or 10 days - not long enough for many loans or home sales to be completed. If you exceed the lock-in period and your rate expires, you may see your loan rate go up.

Think rates might drop while your loan is being processed? At the time of your application, you might want to take a risk and let it "float" instead of locking. You can watch rates and lock in at any time until the day before your loan closes. The moment you tell your lender to lock the rate, that's the rate you'll get. But be careful. Rates are as difficult to predict as the stock market. And if rates suddenly shoot up, you could find yourself with a higher monthly payment than you planned or, even worse, unable to afford the home of your dreams.