When you’re buying a home, sometimes the mortgage lender and the real estate agent seem to speak different languages. When you search for mortgages, you may come across the term APR, which stands for Annual Percentage Rate, an important concept to understand before committing to a home loan. Here’s what you need to know.
What is the APR on a mortgage?
It’s easy to confuse APR with interest rates when it comes to interest rates on mortgages, but they’re not the same thing. APR reflects interest rate and any other charges such as B. setup fees and credits. For the most accurate comparison of two mortgage loan quotes, the APR gives you a better idea of the overall cost of each mortgage than the interest rate.
“APR helps borrowers understand the true total cost of their mortgage,” says Nilay Gandhi, senior wealth advisor at Vanguard Personal Advisor Services in Philadelphia.
Because the APR considers fees beyond the interest rate, it’s wise to focus on each to get the best overall rate on your mortgage. Small changes in the APR over time can have a big impact on the total amount you pay for your home.
In summary, “the higher the APR, the more you pay, all else being equal,” Gandhi says.
How does APR handle mortgages?
Understanding how APR affects your home loan is an important part of the decision-making process. You can choose one option over the other based on the APR offered by your lender.
When it comes to APR on a mortgage, it’s not just interest. In addition to interest, APR may include processing and underwriting fees, mortgage credits, and personal mortgage insurance. The APR determines the total annual cost of borrowing from a lender. It’s important to learn as much as possible about your loan before accepting and signing it, as APRs can vary from lender to lender
What does a mortgage payment include?
Mortgage payments consist of principal and interest. Principal is the amount you borrow. Interest is a percentage you accept before signing the loan, which is paid directly to the lender. Paying the extra principal reduces the interest you owe.
Mortgage rates can be fixed or variable. While a fixed rate stays the same throughout the life of the loan, an adjustable rate mortgage (ARM) can go up or down during the life of your loan. If your tariff changes, your payment will also change. ARMs have an interest rate cap that limits how much the rate can change each year and over the life of the loan. Most ARMs also have an initial fixed rate period before the rate changes. For example, a homeowner with an ARM might have a 4% five-year fixed rate that then changes every year as the index changes.
The interest rate offered by a lender depends on several factors, including:
- The amount you want to borrow
- How much do you plan to loan
- Required loan term
- Your timely payment history
- The type of loan you want
- Your location
The bottom line
When you apply for a mortgage, lenders consider a variety of factors, including your credit rating, employment, income, debt, assets, and down payment, to help them determine the interest rate to offer you.
