Buying a home can be stressful. It requires both financial stability and a long-term commitment, and if you do not find a home loan, or mortgage, that best meets your needs, you could be losing out on a significant amount of money. Before settling with any one specific mortgage broker or lender, make sure you are getting the best deal for your investment.
APR
The annual percentage rate, or APR, of a mortgage represents the yearly credit cost, including interest fee, broker fees, points and any other charges the borrower owes. It represents how much you are actually paying yearly for a specific type of loan so that you can compare mortgages with very different points and interest fees.
Benefits of an APR
The APR takes into account many fees that may otherwise be confusing, like discount points--"down payments" you make based on an upfront percentage of your loan to lower your interest rate. For instance, if you take out a $100,000 mortgage, you can pay three points, or 3 percent, of your mortgage right away to receive a lower interest rate, depending on your lender. An APR takes this information into account so that you can better see the differences between loan options without having to do any major calculations.
Retrieving APR Information
Because federal law requires the disclosure of APRs under the Truth in Lending Act, lenders have to provide you with the APR of a loan. Some websites and pamphlets will include this information upfront. However, if a company is being uncooperative in revealing an APR, you may be better off with another lender.
Limitations of APR
A loan with a good APR may be nice for now but not so great in the future. Depending on whether the interest rate of a mortgage is fixed or variable, APRs can change over time. A variable interest rate depends upon the market and fluctuates as the economy changes. Therefore, an APR dependent on a variable rate does not consider how much the interest rate will be in the future, only what it is at the moment. Also, the APR does not account for every expense, such as title fees and credit reports.
Term Length
A lower APR does not guarantee that one mortgage is better than another. For instance, consider two lenders for a $150,000 mortgage for a 30-year term. Lender A with an APR of 6.71 percent offers a 6.25 percent interest rate, one discount point for $1,500 and $5,500 in fees. Lender B with an APR of 6.83 percent offers a 6.5 percent interest rate, no discount points and $5,000 in fees. Although lender A has the better APR, you have to provide $2,000 more in points and fees. If you do not have the extra cash available, lender B is a better option. Also, the monthly price difference between the two deals is $24.52. At that rate, it will take loan A approximately 6.83 years to be a better deal than loan B. If you can sell the house and get rid of the loan before then, in the short-term, loan B will be the best option. Otherwise, in the long-term, the lower APR is always the best option.
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