When mortgage lenders advertise an interest rate, they are legally required to also disclose the loanâ€™s APR, or Annual Percentage Rate.
ItÂ tells you the whole cost of borrowing -- the interestÂ plus loan feesÂ and points -- and it'sÂ supposed to make it easier for consumers to compare mortgage offers.
However, thereâ€™s a lot of confusion about what APR really means, and how to use it to get the best mortgage rate when you shop for a home loan.
This guide explains Annual Percentage Rate, its limitations, and how to use it (or NOT use it) to shop for a mortgage.Click to see today's rates (Apr 24th, 2017)
Annual Percentage RateÂ tells you how the loan's fees affects its total cost. If you borrow $100,000 at 3.25 percent, your payment would be $435. However, if the loan costs you $5,500, you're making the payment for a $100,000 mortgage, but only actually getting $94,500 ($100,000 - $5,500).
In reality, then, you'd beÂ paying more than 3.25 percent when you borrow.
One reason itâ€™s important to look at a loanâ€™s Annual Percentage Rate is that someÂ lenders advertise very low rates to get you to click on their ads and work with them. However, if you see a mortgage offer with a very, very low interest rate, check its APR.
When the APR is significantly higher than the advertised interest rate, chances are it comes with expensiveÂ upfront costs, and it might not be the best deal for you.
Annual Percentage Rate is another way of showing the cost of your mortgage â€“ its interest plus its fees -- to make comparing loans with different rates and pricing easier.
Suppose youâ€™re considering three $100,000 loans â€“ Loan A has an interest rate of 3.25 percent and $5,500 in loan costs, while Loan B has $1,000 in charges and an interest rate of 3.5 percent. Loan C has a 3.75 percent rate and zero costs. Which is better?
Loan C has no costs, so its APR equals its interest rate. Loan Bâ€™s lower fees make it cheaper than Loan A over the life of the loan, even though its payment is higher.
The APR can be equal to or lower than the advertised rate.
So-called â€śno-costâ€ť loans have APRs equal to their advertised interest rates.
If you have a loan in which the lender pays you a rebate for accepting a higher interest rate, your Annual Percentage Rate for that loan may be lower than the advertised interest rate. This may also be the case for certain adjustable rate mortgages (ARMs) with introductory fixed-rate periods.Click to see today's rates (Apr 24th, 2017)
No! Too many articles tell borrowers to just choose the loan with the lowest APR, but itâ€™s not that simple. When the loan with the lowest APR also has the lowest upfront costs, it does represent the best deal.
But when the loan with the lower APR comes with higher upfront costs, the math can change if you repay your loan early. That's because your upfront costs stay the same, but they are spread over fewer months.
Here's what happens to the examples above if you sell or refinance in five years instead of 30:
In general, if you expect to have your loan for only a few years, the loan with lower upfront costs is less risky.
APR cannot be reliably used for every loan shopping situation. Here are limitations to be aware of:
The APR for ARM loans assume that the interest rate does not change during the loanâ€™s introductory period (five years in the case of a 5/1 ARM); it takes for granted that when it begins adjusting, the new rate will be based on current financial indexes, not future ones.
No one can predict the future.
ARM APRs are slightly useful for comparing similar ARM loans to each other, but the actual APR over the life of your loan will almost certainly be different.
Follow these rules when using Annual Percentage Rate to shop for a home loan:
However you choose to shop for your mortgage, the important thing is that you do shop. Compare quotes from several competing lenders before you commit to a mortgage.
Mortgage rates are low, and home buyers and refinancing households are finding near-record low APRs.
Check today's rates and get a quote from at least three sources to get your best mortgage value.Click to see today's rates (Apr 24th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)