What is APR? How Does it Apply to My Mortgage?
Knowing ‘What is APR and how does it apply to my mortgage?’ can help you in the hunt for a quality mortgage, a home that is in your budget and fits your needs. APR stands for “annual percentage rate.” It is not actually a number that affects the cost of your loan, but is more a number which may help you calculate the accurate overall cost of a mortgage loan. Acquiring a reasonable interest rate is one critical step, but you should also know that the difference of one percentage point (which can vary from mortgage to mortgage when calculated with APR) could save or cost you tens of thousands of dollars in interest payments.
APR is intended to help you evaluate loans by making them more comparable. According to David Newton, an economics professor at Westmont College in Santa Barbara, Calif.”It’s the one common denominator by which you can compare loans side by side, comparing apples to apples to apples,” As Newton explains it, APR measures the net effective cost of borrowing “the actual present value of those funds over the length of the contract.” In other words, APR answers the question: “Is it worth it to pay more upfront to get a lower rate?”
The interest rate is not the only expense in a home mortgage. Closing costs and other expenses are added by every lender at the signing of the loan contract. The reason the APR is higher than your interest rate is that it takes in to account all the fees associated with your mortgage and then recalculates the cost of the total amount of money over the life of the loan. The interest rate of your mortgage doesn’t take in to account all these peripheral costs of getting the mortgage, and that’s where the difference is.
The costs included in an APR, but withheld from an interest rate can include:
- Appraisal fees
- Attorney fees
- Processing of the loan
- Private Mortgage Insurance
- Your broker’s personal fees
However you should also know the following if you want know ‘What is APR, and why should I care about it?’:
- APR can be manipulated. By excluding fees from APR calculation, any broker or lender can make the APR look lower than it actually is.
- It is not necessary for brokers to disclose APR. The Federal Truth In Lending Disclosure is only required to be disclosed by lenders, not brokers. If you get an APR quote from a lender and compare it to an interest rate quote from a broker, you are looking at two different rates, which can be confusing, to say the least.
- Using APR as a basis for comparison really only works over the full term of the loan. If you know that you are only in the loan for a short period of time, you are not going to be in the loan long enough to reap the benefits of paying additional cash up front for a lower APR.
Knowing the answer to the question, “What is APR” is just one piece of the puzzle when you are looking for a home and applying for a mortgage. It is important to take your time during the loan process, ask lots of questions every step of the way, and make sure you’re not getting in over your head. For more information on interest rates, mortgages, and other house buying factors have a look around Chicago Mortgage Spot.