Posted: 2019-01-28 | Author: Scott Roberts
When you are shopping for a home mortgage, there are some terms that you will need to become familiar with. Two of the most important are the interest rate and the annual percentage rate (APR). Although these terms are similar and both provide a description of what you are going to pay, they are not the same thing.
Interest Rate: The interest rate is the cost of borrowing the principle amount of your mortgage, expressed as an annual percentage. This rate does not reflect any other charges or fees that you might have to pay to obtain the loan. You will find the interest rate on page one of your loan estimate.
APR: Annual percentage rate is a more comprehensive figure that reflects the overall cost to borrow the money, and it can be found on page three of your loan estimate. In addition to the annual interest rate, the APR includes other closing cost such as:
It is important to note that the APR may not reflect all of the fees associated with purchasing the property. For example, title insurance examinations, property appraisals, and some other fees may not be included. Be sure to review your loan estimate carefully and ask your lender if there are any other fees that they did not include in the annual percentage rate.
It is also important to note that the APR does not reflect the maximum interest rate on an adjustable rate loan (ARM). The APR will be able to provide the maximum rate for the initial fixed period of the loan (e.g., the first five years with a 5/1 ARM), but since it is impossible to predict the future, it cannot account for future increases or decreases in the interest rate beyond that initial period.
Which Term is More Important when I apply for a Mortgage: Many people assume that, since APR reflects the overall cost of a mortgage, this is the most important number to look at when considering mortgage options. However, this is not necessarily the case. Whether interest rate or APR is most important depends on your specific circumstances and your home ownership goals. In general, for those who plan on staying in the home longer, interest rate is usually the most important factor. On the other hand, if you think you will only own the property for a couple of years, a higher interest rate may not be all that important.
For example, if you are only planning to be in the home for a short period of time, it would not make sense to pay thousands of dollars in closing costs. You would likely be better off going for a higher interest rate with lower upfront costs, even if the overall APR on this type of loan was higher. The reverse is true if you plan to be in the home for the long term. In this case, it might be worth it to pay a couple of discount points to buy down your interest rate.
Contact a Local Expert to Discuss your Mortgage Options: A home mortgage is likely the most important loan you will ever take out. There are numerous factors that must be considered, and with a decision of this magnitude, it makes sense to seek help from local experts who can point you in the right direction. By working with a local lending expert, you obtain guidance and direction from someone who can show you multiple options and help you find the right mortgage to meet your needs and goals.