If you’re in the process of shopping around for a mortgage, you may have noticed a small asterisk with a number beside the interest rate. This is the APR, or annual percentage rate – a crucial component of your loan.
Knowing about the APR will help you, as a homebuyer, make a more informed decision about your mortgage loan. Feel confident in your ability to make the right choice by reading on.
What Is The APR?
The annual percentage rate is the interest charged on your total loan amount – with all of the extra costs of getting a loan included. Regular mortgage interest rates reflect the cost of a mortgage to you, the homeowner, broken down into your monthly payments. The APR, on the other hand, includes the total cost of your loan, not just the monthly interest calculations, meaning that the mortgage interest rate and all other applicable costs are bundled under the APR.
The Additional Costs Included In The APR
Calculating APRs to compare loans is important, and will help you decide on the right loan for you. It also helps illustrate the different fees that contribute to the overall cost of your mortgage aside from just the interest rate.
So what are these extra fees, and why do you need to worry about them in the context of your mortgage loan payments?
Consider a scenario where you want to access a loan of $200,000 for your new home. At a 4.5% interest rate for a 30-year loan term, you’ll be paying around $1,000 a month. Now, in order to get this loan, let’s say you paid a 1% origination fee of $2,000, one point, and closing costs of $800. With these additional calculations, your APR is 4.7%.
The type of loan you get and the costs required with the loan will ultimately be what affects your APR.
High And Low APRs Compared
As with any interest rate, the lower the percentage, the less you will pay. However, with home mortgage loans, a lower APR may sometimes cost you more in fees, adding an additional burden to the costs associated with buying a home. It may be better for your current situation to take a loan with a higher APR to avoid these additional costs.
The life of your loan will also help you decide whether a higher or lower APR works for you. For example, if you’re planning on holding onto the loan for a longer period, a loan with a low APR will spread out all of the additional loan costs over time, keeping payments down. However, if you want to pay the loan off faster, you may find that a lower APR burdens you with higher costs in the short term.
Check the APR calculations for any loan you are considering to ensure that you are selecting the overall best choice, not just the one that looks the best on the surface.
If you’re ready to get started finding the right home mortgage loan, answer a few questions here and a home lending expert will contact you.