So you've decided to purchase a home in Moon Valley and you want to get the best deal on your mortgage. You get on Google and type in Phoenix Home Mortgage to check rates but all the advertisements have this other rate with the letters APR next to it. What is APR and why should you be concerned about it when you're financing your home in Moon Valley?
Annual Percentage Rate (APR) is a tool that consumers can use as a starting point to compare loan programs. However, it's important to keep in mind that APR is not a perfect system, and not all lenders calculate APR in the same way. While the Federal Truth-in-Lending Act does require mortgage brokers or lenders to disclose APR to the consumer, there is no rule written in stone for calculating this number that each and every lender agrees upon.
The "nominal rate" is the basic interest rate charged on the money you borrow (the principal). The "annual percentage rate" - or APR - factors in some of the upfront costs that vary from one loan to another (like points, fees and mortgage insurance) and spreads them over the life of the loan. (Other fees - like document preparation and application fees, title insurance, or appraisals - aren't included.)
In theory, you'll pay the same amount for two loans with the same APR - if you stick with that loan for the full 15-year or 30-year term. But few people do; most either refinance their mortgage or sell their house and move on long before their original mortgage is paid off. If you plan to move in a few years, you may want the loan with the lowest upfront costs, regardless of the APR.
How it works
Here's an example of how a comparison of APRs works in the case of two loan offers for a 30-year, fixed-rate loan of $150,000:
Offer A: Quotes an interest rate of 6.5 percent, plus one discount point and an origination fee of 2 percent.
Offer B: Quotes an interest rate of 6.4 percent, but charges two discount points, the same origination fee, and higher closing costs.
While the second loan may carry a lower interest rate and a lower monthly payment, a comparison of the APRs indicates that it is actually slightly more expensive overall because of the higher upfront fees:
|
Offer A |
Offer B |
|
|
Interest rate |
6.5% |
6.4% |
|
Monthly payment |
$948.10 |
$938.26 |
|
Discount points |
1 point (1% of $150,000) = $1,500 |
2 points (2% of $150,000) = $3,000 |
|
2% origination fee |
$3,000 |
$3,000 |
|
Other closing fees |
$800 |
$1,150 |
|
APR |
6.837% |
6.851% |
Bottom line... be careful and think twice about those advertised low rates when they are accompanied by higher fees.
If you're thinking about refinancing your existing mortgage or buying a new home in the Moon Valley area in Phoenix, contact the Krushinsky Team at 602-695-7575 or david@dkhomeloans.com. Get pre-approved before you begin the search for your new home.
