In buying a home or re-financing you need a home loan. The importance examining of the APR the Annual Percentage Rate can not be overstated. Unfortunately, many borrowers focus on the interest rate rather than the APR the annual percentage rate.
Interest Rate
The interest rate is pretty straight forward to understand. It is the money you owe for the duration of the time you borrowed the money. So if you borrow $100 for a year at 5% annual rate, at the end of a year you will owe the original $100 plus $5 (5% of the $100 borrowed). Anyone looking to borrow money will naturally look for the lowest possible interest rate as that means the cheapest cost to borrow money. This would be correct if the interest rate is the only cost facing the borrower.
Other Costs
These days, when taking out a home loan, you will be faced with a fee (or points) just to get the loan. Then there is the cost of an appraisal. Your lender will require title insurance insuring them (in addition to yourself). Notary fees, escrow fees, wire transfer fees and courier fees are all part of any purchase/refinance. There may be other expenses depending on the situation.
APR
The APR the annual percentage rate takes both the interest rate and the other costs into consideration. Even though you will pay interest every month but you only pay the other costs up-front, you need to consider both when you are seeking a loan. Is getting the absolute lowest interest rate a good thing if your other costs are three times what your friend paid for their loan? How can you compare the two loans? This is when APR is a big help. The APR takes the upfront costs and spreads them over the same period as the interest rate and then calculates the total yearly cost of the loan. You may not keep the loan for then next 30 years. If that’s the case, then you annual cost is actually higher. However, this would have been the case of any loan you chose to use.
Comparison Shopping
When shopping for a loan, the lowest interest rates will come with larger other costs (fees). Using the APR the annual percentage rate will help you compare loans that appear to be very different. Note: make sure you carefully read the fine print. It will tell you what has been included in the calculations. It is very important that the loans being considered are all including the same type of costs.
You will find that 0 points (no fee) loans have a higher interest rate. Why? Because they simply recover those cost over the life of the loan in the form of a slightly higher loan. Is this a good thing or a bad thing? It depends on how long you keep the same loan. If interest rates drop over the next few years, you may want to re-finance. On the other hand rates may rise. If so, you will want to keep your loan.
If you need a home loan and want to explore your options, contact me at 760 622 5087 or [email protected] As a mortgage broker, I assess your needs, then look for the loan that will do the best job of meeting your needs. And then I work with you to make sure you get the loan.
Photo Erik McLean on Unsplash
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