What you need to know when buying a mortgage

What you need to know when buying a mortgage

As you go through , you will encounter different interest rates when looking for loans online or working with lenders.

Let’s talk about what APR means and the difference between APR and interest rate so you can feel confident in the home loan you choose to finance the biggest purchase of your life.

What does APR mean?

APR is an acronym for “annual percentage rate,” which indicates the total cost of borrowing your loan. In essence, this is what you pay on top of the principal balance you borrow.

Your interest rate is a component of your mortgage APR, but since your APR is the total amount of your home loan on an annual basis, it includes other costs. Therefore, your APR is likely to be higher than your interest rate.

How does APR work?

Points and fees

Other costs that may be included in your mortgage APR, besides your interest rate, include mortgage points, origination or underwriting fees, or option closing costs.

The mortgage point (if applicable), fee, and closing cost elements of your APR affect the amount of money you need if . You pay the expenses in cash to settle your home loan.

The interest rate

The interest rate aspect of your mortgage APR influences your ongoing monthly payment amount. The higher your interest rate, the higher your home payment (and total cost of the home loan).

You can choose to pay off mortgage points to lower your interest rate.

Yahoo Finance Tip: APR calculation processes can vary from lender to lender, so it’s wise to ask your financial institution what costs are reflected in the numbers they provide. If you’re looking to do a little research on your own, a good one can give you some estimates.

How to use APR when mortgage shopping

“I think the mortgage APR is generally the best way to compare rates because the APR includes origination fees and closing costs,” says Ted Erhart, certified financial planner and founder of Norris Lake Retirement Planning, via email interview.

“In other words,” said Erhart, “it’s a full ‘price’ for the loan. When you shop for loans on the internet, you often see advertisements for what appear to be low prices. . But if you look closely, the rate offered has two, three, or more points of origin. Therefore, the face rate is misleading because it does not include thousands of dollars of origin and closing costs.”

You can find the mortgage APR on page three of the Loan Estimate form provided by the lender. Your lender must provide you with a copy of this document within three days of receiving your loan application.

Yahoo Finance Tip: Make sure you compare apples to apples when reviewing your mortgage options. Request that lenders provide loan estimates without credit points attached.

How can I get a low APR?

Since the interest rate is one of the main factors influencing your mortgage APR, here are some strategies that can reduce your borrowing costs:

  1. Improve your and reduce debt.

  2. Always compare mortgage offers from multiple lenders. You may find one lender that charges a smaller (or less expensive) fee than another.

  3. Length can affect the APR you pay, too.

Dig deeper:

If a higher mortgage APR is worth it

Although it may seem counterintuitive, there are times when a higher mortgage APR can work in your favor.

“For example, if the borrower plans to stay in the home for a short period of time, they may choose a loan with a higher payment (and thus a higher APR) in exchange for a lower interest rate. . This strategy can be cost-effective if the lower interest payments outweigh the upfront payments over the time the borrower holds the loan,” said Bryan Jordan, certified financial planner and managing partner at Censifi. , by email.

Erhart says, “A higher APR may make sense for someone who is more concerned about monthly cash flow as opposed to interest expense. For example, a 15-year term typically has lower rates and APRs than 30-year mortgages. But many home buyers are willing to pay a higher rate for a lower monthly payment.”

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