More than one home buyer has been startled to read the APR on their loan closing statement and see that it isn’t the same as their quoted interest rate. They react with “Wait a minute! This isn’t right!”
What they don’t know is that the APR is how much the borrower will pay in interest and other fees. The APR is the total cost of borrowing money over a one year period.
Those other fees include items such as the closing costs, points, origination fees, and private mortgage insurance. These are all lender fees.
In order to make a true comparison, you should obtain and use both your interest rate and your APR when comparing the cost of purchase or refinance loans from different lenders. Two different lenders could quote you the same interest rate, yet have vastly different APRs. This is because one is charging more for the privilege of borrowing money.
Do be aware that some lenders move some of their costs out of the APR, so take the time to read what is included in each estimate before relying solely on the APR numbers.
Some of your closing costs – those that are 3rd party fees – aren’t included in the APR. These would include the appraisal, title search and insurance, credit report, and transfer taxes.
Both the APR and the Interest rate are important
The APR covers up front fees that you’ll pay at closing. Your interest rate will keep on for the life of the loan. Look at both numbers and compare. Then do the math. It could be wise to pay a higher APR (more out of pocket at closing) in order to obtain a lower ongoing interest rate.
Different lenders offer different APRs and different interest rates, so it does pay to shop around.
Why was I not offered the advertised interest rate?
The advertised interest rate is the best the company has to offer. Unfortunately, most borrowers don’t qualify for the best, due to variations in their situation and the loan they seek.
Six factors are taken into consideration in determining the interest rate a lender will offer. To make it even more confusing, different lenders rate these six factors in different ways.
The factors are:
- Your FICO credit score
- The loan amount and down payment
- The location of the home in question
- The loan type
- The length of the loan (term)
- The type of interest rate
First, your credit score. As you probably know, this is a reflection of your bill-paying habits over the past many years. Lenders see your numerical score as a prediction of how reliable you’ll be in making a monthly mortgage payment. The higher your score, the better interest rate you can obtain. A perfect sore is 850.
Note that your FICO credit score may be different than the score obtained by a car dealer or insurance company.
Your loan amount and down payment matter because they’re a measure of the risk your bank takes when lending against the house. The more of your own money you can invest, the less risk there is to the bank. Banks feel much more secure when you’ve put down 20% than when you’ve only put down 5%.
This is why loans with down payments of less than 20% come with private mortgage insurance (PMI). This will cost you from 0.3% to 1.15% of your home loan, and is added to your payment monthly. While this is insurance paid for by the borrower, it only covers the lender in case of default.
The home’s location. Interest rates are affected by the strength of your local housing market.
The loan type: Conventional mortgages, which are geared toward borrows with well-established credit, steady income, and solid assets, carry the lowest interest rates. FHA, VA, or Rural Development Loans, which are government backed loans available for little or no down payment, carry slightly higher rates.
The loan term: Shorter term loans carry lower interest rates. Thus, borrowers who are able to meet the larger monthly payments on a 15-year loan will save even more than they save by paying the loan off sooner.
The type of interest rate: Borrowers can opt for a fixed-rate mortgage or an adjustable-rate mortgage, or ARM.
A fixed-rate mortgage is just what it says. The rate is fixed at the time of the loan and does not change. The only adjustments to the borrower’s monthly mortgage payment will come from increases in taxes or homeowner’s insurance.
Adjustable rate mortgages generally start out at a lower interest rate than a fixed-rate mortgage, then the rate adjusts (increases) over time. Rates are adjusted at pre-set intervals of 3, 5, 7, or 10 years.
Adjustable rate mortgages can be beneficial to borrowers who plan to move before the rate adjusts or who feel assured of an increase in income before the end of the adjustment period.
Here at Homewood Mortgage, the Mike Clover Group, we’re pleased to offer the lowest interest rates and APRs available in Texas. We’re also pleased to offer pre-approval services and to help our borrowers determine the most beneficial loan for their unique situation.
Call us today at 800-223-7409