MORTGAGE RATE VS APR – Know More About These : Payday LV

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What is interest rate?

Mortgage rate or interest rate is a percentage you pay to borrow money from a lender for a specific period of time. Whenever you go for shopping for real estate or you are looking for a refinance ,mortgage rates are clearly advertised. Your mortgage interest rate might be fixed which means it stays same throughout the duration of your loan while it they can also be variable and it might change depending upon the market capital changes.

It is always expressed as a percentage and represents the interest rate you will pay every month on your home loan which determines the size of your monthly payments. So the monthly payment includes both the initial amount you borrow that is your principal and any interest that accumulates on your loan. Initially when your principal balance is high, you will pay more money towards interest while as the time proceeds and you owe less in interest and pay higher percentage of your payment to your principal. This process is called amortization.

mortgage rates and Apr paydaylv

mortgage rates and Apr paydaylv

To quote an example in case you borrow $100,000 for a home and interest rate is 4% this means at the embankment of your loan your mortgage builds 4% interest every year that is 4% of $100,000 is equal to $4000 annually or about $333.33 a month.

What is APR?

However during observation of an advertisement, while looking for an appropriate and accurate lender, while buying a home or during refinancing, a second similar percentage might be visible below the interest rate or adjacent to it in a finer print. This is actually the annual percentage rate[APR]. It reflects mortgage or the interest rate along with other charges so it is a broader measure of the cost of borrowing of money than the interest rate. Other charges include certain loan costs like processing fees, underwriting, loan origination fees, mortgage points, broker fees and so on. Hence it is usually higher than the interest rate.

To illustrate, if you are applying for a mortgage and you receive a loan estimate paper from one or more lenders, while you are doing a comparative study before applying to one of the lenders, you will always find interest rate on Page 1 under the heading of Loan Terms while the APR  is always found after a few pages probably on Page 3 under the heading of Comparisons .So the loan estimate from different lenders helps you gather more information to procure loan and understand the norms and the regulations and select the right one in accordance with your financial stand.

There are many costs associated with taking out mortgage:

  • The interest rate
  • Points
  • Fees
  • Other charges.

So APR is a calculation which determines the total cost of the loan, also called as cost of borrowing represented annually.

The APR addresses the issue of false play by the mortgage lenders, who might not disclose all the charges associated with the loan to make their deal a more lucrative one in the market competition. Many borrowers will fall prey to such lenders, who make their offer look affordable and unbeatable. However once the total costs are factored in, the borrower is already into the web of the lender.

Therefore, whenever you receive a loan estimate the APR briefs about various fees associated with the loan transaction and are responsible for comparisons. Paradoxically, only APR is not a radical base to apply for a loan with a particular lender, a close look at the black ink on the estimate paper can lead you to have an insight into the other fees included or associated with APR, which is also a part of the deal .

APR, hence can be regarded as more accurate representation of the cost of borrowing beyond the interest rate .So it is very important to consider both the APR and the interest rates while closing any deal.

APR limitations:

  • The mortgage lenders and the banks calculate APR differently
  • Same fees is not always added in the calculation
  • Mortgage APR assumes that you will hold a loan till amortization but the entire scenario takes a different turn when most of the borrowers sell or refinance before the loan maturity. That is, they keep the mortgage for a short period. APR goes down as the loan term goes up and vice versa.
  • APR on adjustable rate mortgages are particularly deceiving. The APR may present to be lower than the mortgage rate, since the fully indexed rate is merely estimated ,so you may be attracted to the fallacies, which appear quite affordable as the APR seems to be low. However such situation doesn’t stay the same for long.
  • For fixed rate mortgages APR typically exceeds the interest rate unless it is a no cost refinance.
  • Likewise in FHA loans the APR is probable to skyrocket with time which makes them un-affordably and not as cheap as they appear.

Mortgage APR is simply calculated by subtracting the loan costs from the loan amounts.

 POINTS OF DIFFERENCE BETWEEN APR AND INTEREST RATES:

The major difference between a mortgage rate and the APR is that it is a broader estimation of your loan amount while the interest rate is only a percentage of the total borrowed money. APR is inclusive of the interest rate and other fees. Thence it can also be called as effective rate of interest.

APR is the true cost of a home loan and it must be used when comparing lenders.

Fees included in APR:

  • Discount points or broker fee
  • Origination fee
  • Mortgage points
  • Discount points
  • Prepaid interest
  • Processing fee
  • Underwriting fee
  • Document drawing fee
  • Mortgage insurance.

Fee not included in APR

  • Title fee
  • Notary fee
  • Escrow fee
  • Credit report
  • Attorney fee
  • Doctor prep fee
  • Pest inspection fee
  • Appraisal review fee
  • Recording fee
  • Hazard insurance
  • Home inspection fee

These are mostly grouped into 3rd party fees which are not from the lender itself.

IN NUTSHELL

Before getting yourself colored into a mortgage loan ,whether to buy a home or making an investment, it is always alleged to have an avid overall understanding of both the mortgage rates and APRs.

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