When you’re shopping for a mortgage loan, you may have encountered the phrase “APR- Annual Percentage Rate” being advertised, just like when you’re looking for a credit card. Although, not everyone knows the meaning of APR, or understands how it differs from an interest rate. However, it’s a very important factor and can have a critical impact on your search for a home loan. An explanation of an APR is given below along with how it can affect your monthly loan payment.
When you’re trying to understand the annual percentage rate (APR), then it’s important to know how it compares to the interest rate you’ll have to pay on your mortgage loan. The interest rate is actually the percentage you’ll have to pay to borrow the amount for your property. This interest rate does not consist of any other fees or charges linked with your loan, but it rather gives you the amount of your monthly mortgage payment. Your credit score and loan type also helps determine the interest rate you’ll have to pay on your mortgage.
Your APR, however, reflects the exact and total cost of your mortgage loan. Your APR is the combination of your interest rate plus other upfront costs and fees your lender charges to get that interest rate or to close the mortgage, such as fees, points, or any other costs related with the mortgage.
The APR usually publicized next to the advertised and also known as nominal interest rate, is typically higher than actual loan’s interest rate as it annualizes the costs and fees connected with the mortgage. The APR is your yield to maturity on all of the finance charges you pay. Moreover, it also shows you a clearer picture of the annual cost of your mortgage.
Knowing your APR
Understanding your APR can help you in comparing different loans between several lenders, and you can probably save thousands of dollars. Even if several lenders advertising similar interest rate, for example, 4.75%, the annual percentage rate of one of the lender might be 4.90% and of another 5.25% (because they might have higher closing costs and other fees to acquire the loan). On the other hand, one of the lenders might be offering higher interest rate with lower closing costs, thus making it a far better loan option than the one that is advertised with lower interest rate and have higher other related costs.
The higher your APR is, the more you have to pay over the period of your loan. So it’s more likely that your APR will be higher if you opt to pay less in closing costs, while you’ll get a lower APR if you pay more in closing costs.
What it’s comprised of?
Annual percentage rate’s fees and costs may include an origination fee, any discount points, costs of mortgage insurance premiums and the closing costs. These costs are usually known as finance charges, even though there can be some other fees that can be part of the APR but not listed under finance charges.
If you’re paying your homeowner insurance or property taxes through your lender as those payments are held in escrow, they don’t become part of the APR as those are not the costs that are billed to you by your lender. The lender is just representing an agency or working on behalf of the county to collect those payments from you.
Advertised APR vs. Actual APR
Even though you may find some lower annual percentage rates on an advertisement, your final APR is not determined until your lender’s underwriter vets your loan. It is because a lender might charge lower fees from someone who got a perfect credit score and higher fees for someone who has a lower credit score. Your lender has to examine your credit report to determine your actual credit score. Usually the lower the credit score you, the higher the interest rate you’ll receive.
Your projected APR will be disclosed to you via a document called Loan Estimate (LE). Your APR is considered final when you’ve locked in your interest rate.
Sometimes a Higher Interest Rate is better
There are times when your loan with a higher APR would be cheaper than the loan with a lower APR.
As a high APR usually comes with a lower rate, you might think about that option if the seller of the home is paying the closing costs on your behalf, without adding those costs into the price of the property.
Let’s say, you offered $200,000 on the house listed at $210,000, and your seller agrees to pay closing costs for you. As the closing cost is paid by the property seller and you don’t have to pay extra for it, a mortgage with higher APR and low-interest rate might be a better option for you in comparison with the one with a low APR and higher interest rate.
Rules & Regulations
All lenders must notify you of the APR under the federal government’s act of consumer protection. This is performed through the TILA (Truth in Lending Act).
TILA makes sure that the credit terms are disclosed to the client in a meaningful way so that the client can compare credit terms of the loan easily and make a well-informed decision about the best loan option for their requirements.
Customers found it very difficult to compare two loans before TILA’s enactment as they were presented in different formats. At present, all creditors must use the same expressions of rates and credit terminology so that the customer can look at the APR as a point of comparison. Although, for a better comparison, customers should still look at an itemized list of what costs and fees are integrated into that APR. Like one lender might not count the courier fees while the other might add it.
Also, if you are applying for a primary home mortgage, are taking a loan for an investment property, or refinancing, your annual interest rate may differ. It might also be different if you are taking out an adjustable-rate loan or a fixed-rate mortgage as the federal government regulates those mortgage loans differently.
If you need help in calculating your APR and want to see if you can afford a specific property, call our loan experts at Texas Trust Loans at (888)-971-1425 to get proper information and guidance.