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An interest rate is the percentage of your loan amount that a lender charges you to borrow money. For mortgages, this rate determines how much you'll pay in interest over the life of your loan. The rate you receive depends on various factors including your credit score, down payment, loan term, and current market conditions. A lower interest rate means lower monthly payments and less money paid over the life of your loan.

While both measure the cost of borrowing, they're different. The interest rate is the percentage you pay annually on the principal loan amount. APR (Annual Percentage Rate) includes the interest rate plus additional costs like origination fees, discount points, and other lender fees, expressed as a yearly rate. APR gives you a more complete picture of the loan's total cost, making it easier to compare offers from different lenders. The APR is almost always higher than the interest rate.

Mortgage points, also called discount points, are fees you pay directly to the lender at closing in exchange for a reduced interest rate. One point costs 1% of your loan amount and typically lowers your rate by about 0.25%. For example, on a $300,000 loan, one point would cost $3,000. Points can be worth it if you plan to stay in the home long enough for the monthly payment savings to offset the upfront cost. This is typically 5-7 years, but it varies based on your specific situation.

A teaser rate is an introductory interest rate that's lower than the standard rate and typically offered on adjustable-rate mortgages (ARMs). This rate usually lasts for a specific period, often 3-10 years, before adjusting to a variable rate based on market conditions. While teaser rates can offer lower initial payments, it's important to understand how much your rate and payments could increase after the introductory period ends.

Mortgage closing costs typically range from 2% to 5% of your loan amount. These costs include lender fees (application, origination, and underwriting), third-party fees (appraisal, title search, and insurance), prepaid expenses (property taxes and homeowners insurance), and points if you choose to buy down your rate. The exact amount varies by location, lender, and loan type. Some closing costs can be negotiated, and some lenders offer credits or options to roll closing costs into your loan amount.

The Federal Reserve influences mortgage rates indirectly through its monetary policy decisions. When the Fed adjusts the federal funds rate (the rate banks charge each other for overnight loans), it affects short-term and variable interest rates throughout the economy. While mortgage rates aren't directly tied to the federal funds rate, they often move in the same direction. The Fed's policies also affect inflation expectations and the overall economic environment, which impact long-term rates like mortgages.