December 30th, 2017 4:49 AM by Jackie A. Graves, President
When shopping for a mortgage, you’ve most
likely seen the phrase “annual percentage rate” or “APR” advertised, just like
you would for a credit card. But not everyone understands what an APR is, or
knows how it’s different than an interest rate. And it can make a difference in
your home loan search. Here’s a look at what an annual percentage rate is and
how it affects your monthly mortgage payment.
What is APR?
understanding what the APR, or annual percentage rate is, it’s important to
understand how it compares to the interest rate you’ll pay for your
mortgage. The interest rate is the percentage you will pay to borrow the money
for your home. This rate does not reflect fees or any other charges associated
with the loan, but calculates what your actual monthly mortgage payment would
be. The interest rate you pay depends on factors like your loan type and
annual percentage rate, however, reflects the true and total cost of the loan.
It factors in the interest rate plus any upfront costs and fees that are
charged by the lender to obtain that rate or to close the loan, such as points,
fees, or other costs associated with the loan.
annual percentage rate, usually shown next to the advertised and called “APR”,
or nominal, interest rate, is always higher than the actual, or effective, loan
interest rate because it annualizes the fees and costs associated with the
loan. The APR is the yield to maturity on all the finance charges the borrower
pays. And it provides a more complete picture of the annual cost of your loan.
the annual percentage rate can help you compare different loans among
lenders, and possibly save thousands of dollars. Even if different lenders are
advertising the same interest rate, of say 4.5 percent, the APR of one might be
4.85 percent and of another 5.1 percent – simply because it has higher fees and closing costs to
obtain that loan. Alternatively, one lender could offer a higher interest rate
with lower costs, possibly making it a better loan than one with a lower
advertised interest rate and higher associated costs.
higher the APR, the more you’re going to pay over the life of the loan.
Consider that the less you pay in closing costs the more likely it is that the
APR will be higher; whereas the more you pay in closing fees the APR will be
and costs that may be bundled into the annual percentage rate are the
origination fee, discount points, closing costs and the cost of mortgage
insurance premiums. These fees are often referred to as finance
charges, although there may be other fees that help constitute the APR that are
not listed under finance charges.
you pay your property taxes or homeowners
insurance through your lender because the payments are held in
escrow, these are not part of the annual percentage rate because these are not
charges being billed to you by the lender. The lender is just collecting those
payments on behalf of the county or representing agency.
you may see a great advertised annual percentage rate, your actual annual
rate is not determined until your loan is vetted with the lender’s underwriter.
This is because the lender might charge higher fees for someone with a lower
credit score than someone with near perfect credit. They’ll have to run a
credit report to see what your actual credit score is. Typically, the higher
your credit score, the lower interest rate. Learn
more about credit scores here.
estimated APR is disclosed to you through a Truth in Lending document known as
TILA. This APR is considered final once you have locked in your interest rate.
are occasions when a loan with a higher annual percentage rate would be
cheaper than one with a lower APR.
a high APR typically has a lower the interest rate, you might consider that
option if the seller of the property is paying the closing costs for you,
without rolling the costs into the purchase price.
example, say you offered $210,000 on a home listed at $215,000, and the seller
agrees to pay your closing costs. Since the money for the closing costs is not
extra cash you have to bring to the table, but is money the seller will pay at
closing, a loan with a low interest rate and higher APR – costs and fees –
might be more beneficial to you than one with a higher interest rate and low
consumer protection, the federal government requires that all lenders notify
you of the annual percentage rate. This is done through the Truth
in Lending Act (TILA).
ensures that credit terms are disclosed in a meaningful way so consumers can
easily compare credit terms to make an informed decision about the best loan
for their needs.
TILA’s enactment, consumers found it difficult to compare loans because they
were not presented in the same format. Now, all creditors must use the same
credit terminology and expressions of rates, so consumers are able to look at
the annual percentage rate as a point of comparison. However, for the best
comparison, consumers should still look at an itemized list of what fees are
incorporated into that APR. For example, one lender may count courier fees and
another does not.
your annual rate might also be different if you are requesting a primary home
mortgage, are refinancing or taking out a loan for an investment property. Your
annual rate might also be different if you take out a fixed-rate
mortgage or an adjustable-rate
loan since the federal government regulates these loans
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