What’s the difference when comparing mortgage rate vs. APR and will choosing the wrong one cost you? When shopping for the lowest refinance rates you’ll always find two percentages advertised by the best mortgage lenders. Which one should you trust? Here are several tips before you refi to help you make an informed decision for your next home loan without leaving cash on the table.
Mortgage Rate vs. APR
Simply put, mortgage rate is the interest rate that your payments are based on each month. APR is a government concocted yearly percentage that factors in expenses such as your loan origination fee which intended to give you an idea of the total cost of a mortgage loan. As a tool for shopping for the best home loan can looking at rate vs. APR can help you avoid costly mortgage mistakes?
APR was intended to show you the true cost of your home loan.
Your APR tries to answer the question, if my mortgage is for x amount of dollars and it costs me this much to pay it off after 30 years, my total interest rate would have been this.
Rate vs. APR Limitations
The problem with comparing Rate vs. APR is that there are limitations based on a several assumptions made by the calculation. Comparing rate vs. APR is NOT the apples-to-apples comparison it was intended to be, not even close.
For one thing, Truth-in-Lending laws require banks and mortgage lenders to give the Truth-in-Lending disclosure; however, there are no standards for how it is calculated. Lenders all have their own calculation and not all the costs are included making the calculation worthless for any apples-to-apples comparisons.
The lender’s calculation also assumes you’ll keep the home loan for 30 years without refinancing, which considering the average homeowner refinances every four years is a big assumption. If you pay so much as $1 dollar extra towards the principal balance the calculation is also no longer valid.
APR for ARMs
Sometimes you’ll see lenders advertise ARM loans with an Annual Percentage Rate that is lower than the interest rate. Deceptive? Impossible? This happens when the calculation is made using the fully indexed ARM including the lender’s margin AFTER the loan resets. Indexes used on Adjustable Rate Mortgages are at historically low levels and the calculation in this case is making the assumption that the index will go down once the loan resets.
This is all hypothetical of course making the Rate vs APR comparison less than worthless for ARM home loans. The important lesson to learn is that Rate vs. APR is not the way to shop for a new home loan. The best way to compare to mortgage loans, especially when refinancing, is to look at interest rates compared to closing costs. Ignore the Truth-in-Lending disclosure completely when choosing from today’s best mortgage lenders and you can save yourself thousands of dollars.
Beware Unnecessary Fees When Refinancing
Did you know that the closing costs you pay are the most important aspect of your new home loan? Rather than getting caught up on comparing Rate vs. APR pay attention to unnecessary discount points or the origination fee when shopping for mortgage refinancing. The more you pay closing on your new home loan the longer it’s going to take you to break even recouping your out-of-pocket expenses. Overpaying at closing can even make it impossible to break even meaning you’re losing money no matter how low the refinance rates.
Common junk fees to be on the lookout for include application fees, processing fees, courier fees and the dreaded lock fee. Paying more than one percent for the loan origination fee is also considered junk as many community based credit unions offer zero or ridiculously low mortgage origination fees compared to the top mortgage lenders.
Paying unnecessary discount points is also a waste of money as interest rates are near 60-year lows; however, most lenders quote rates that include points. As you can see there’s more to think about when it comes to your next home loan than rate vs. APR. The good news is that free help is available to you for less than an hour of your time.
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