After applying for a mortgage, you will notice something called APR on your loan estimate. APR or Annual Percentage Rate impacts your mortgage; thus, understanding what it means and how it works is imperative.
APR measures the amount you can expect to pay the loan, stated as an annual percentage rate. It also aids in choosing a loan and how much you’ll end up paying the overall loan.
What is APR?
Basically, APR is the number that aids in evaluating the real cost of your mortgage. The APR is always calculated higher than the interest rate since it includes all other costs. Your APR includes interest, mortgage broker fees, points, lender fees, mortgage insurance, and closing costs.
Understand that not all lenders include all fees in the APR. Often, they do not include inspection, appraisal, and credit reporting fees. To be sure about the inclusions and exclusions, it never hurts to ask.
The Difference Between APR and Interest Rate
APR is the amount you pay with the interest and all other costs related to the mortgage. To put simply, APR is a more comprehensive measure of the loan’s value. Meanwhile, the interest rate is just the rate accumulated on the money you’ve borrowed, so naturally, it’s lower than the APR.
The interest rate is calculated by your credit score and the current rates. Your monthly payment will be based on the computed interest rate and the loan balance. Know that your monthly payment will not be based on APR because the lender actually decides it.
But, You Still Need Both the APR and Interest Rates
Interest rate isn’t the only factor you need to know when it comes to your loan. There are other aspects that determine the cost you need to pay, so comparing both rates is crucial to seeing the actual value of your mortgage payment. Never confuse APR with mortgage interest rate.
How to Use Interest Rate and APR When Comparing Loans
Generally, the lower the APR, the lower your monthly payments will be. Think of how long you’ll stay in your home when comparing loans.
If you intend to stay in your home for just a few years, choose a loan with fewer upfront fees and a higher APR. This is because the cost will be lower over the first few years.
If you plan on residing in the home until retirement, a loan with the lowest APR is your best bet. It will mean lower payments, even if the interest rate is higher than with some other loans.
Both the APR and the interest rate can be complicated factors, so it will be helpful if you ask your lenders about them before getting a loan.
APR is influenced by factors such as debt-to-income ratio, lending, down payment, and credit score. APRs may vary based on the different lenders and loans. This is why it is critical to make a comparison of the various options before getting the mortgage you think will be best.
If you need assistance from local mortgage lenders in Sacramento, CA when buying or refinancing a home, contact Hawkins Home Loans. We are your online resource for a smoother and stress-free process. Contact us today!