What Is Annual Percentage Rate (APR) For Home Mortgages
February 13, 2010 by · Leave a Comment
The annual percentage rate (APR) is the cost of a loan and is calculated by using a standard formula. This yields an interest rate that includes all fees related to the loan, including the mortgage insurance, points, interests, etc.
It is important to know that the amount of money you pay monthly is not affected by the APR. Monthly payments are determined by the term of your loan and the interest rate.
However you must take the APR into consideration when you are contemplating any given home loan. A loan that boasts a low interest rate but has a high APR is not a good bet. Always talk with a qualified mortgage specialist at your financial institution for sage advice.
The APR will be different for loans that are of different durations. For example, a 20 year fixed rate loan will have a different annual percentage rate than will a 30 year loan that also has a fixed rate.
In order to compare the costs from one loan to another it is wise to consult the Good Faith Estimate (GFE). The APR is important but it is only one of many important aspects of a home loan.
When you compare the APR from one financial institution to another, make sure that they are on a level playing field. In other words compare loan programs that are the same, as opposed to completely different. Remember though that the APR will be different depending on the amount of money you wish to borrow. A loan for $250,000 will have a lower APR than will a loan for $100,000 even thought it has the same interest rate. Keep in mind as well that an adjustable rate mortgage loan has an APR that is aware that the loan is indexed and as such that it does not change from its beginning value.
Other Important Aspects of the APR
What else is the APR? It is also the “cost of credit to the borrower in relation to the amount borrowed.” This is always calculated as an annual rate. This is a necessity as stipulated by the Federal Truth in Lending Act, Regulation Z.
A number of items are used to effectively calculate the APR. These include private mortgage insurance (PMI), origination and discount points and prepaid interest. This also takes into consideration any lending fees such as processing, credit reports and underwriting. As well, application fees, administrative fees and tax service fees are a part of this.
Be aware that not all mortgage lenders use the same fees which which to calculate the true cost of a mortgage. APR is a useful tool but be forewarned about the different ways it may be used.
The Federal Truth in Lending Act is a disclosure form that by law must be given to all individuals looking to apply for a mortgage loan. When rates are advertised, the APR MUST be disclosed. All of the bank fees that a lender could charge are here which is why it works well for the purposes of comparison. The true cost of a mortgage loan when you get down to the nitty gritty is what the APR constitutes. The APR helps to keep lenders honest because upfront costs and fees cannot be disguised behind interest rates that are advertised as low.
To use an example from the real world- if you visit one lender and are offered a loan with an interest rate of 6.25 percent with one discount point and another lender offers you a loan with an interest rate of 6.5 percent and zero points then how do you decide which one is the better deal of the two?
Whichever loan has the lowest APR would be the most suitable choice. Bear in mind however that this does not take into account other aspects of the prospective borrower’s financial situation such as his job stability, how much money he has in reserves and how longs he plans to reside in the home he wishes to purchase.
Be aware that the APR is not the same as a note rate. When you have a credit card the APR is often the exact same as the interest rate. However when you take out a mortgage, the APR will be higher than the interest rates you pay due to closing costs.
Compare Mortgage Rates , The Basics
January 24, 2010 by · Leave a Comment
You do your homework when it comes to buying a car or taking a trip so it makes sense that you would do the same when you are looking to buy a home. It is essential that you compare rates from one financial institution to another to ensure that you are getting the best mortgage package that you can.
When you compare loan rates make sure that you compare interest rates for the same day. Do not compare loan rates for two companies on Monday and two other ones on Wednesday. The reason for this is because interest rates go up and down and are subject to change from one day to the next. Interest rates sometimes change as often as different times throughout a given day.
Compare Loan Rates of the Same Kind
When you compare loan rates compare those that are the same as opposed to different. Do not look at a fixed mortgage rate at one bank and an adjustable rate at another. This defeats your purpose and will do nothing but confuse you. Compare loan rates of products that are the same, such as the rate for a 30 year fixed mortgage or the rate for a 20 year adjustable rate mortgage.
As you compare loan rates, make sure that you compare a selection of lenders at the same interest rate and with the same lock-in period (which is generally 30, 45 or 60 days). The interest rates and points you can be offered will vary from lender to lender. Most lenders will also allow you to choose the lock-in period that is best for you. This is why it is essential to compare loan rates from one lender to another.
Lending Fees
Take the total that you are quoted for lending fees and add it to the points and all of the other fees connected to the home loan. Not all lenders use the same names for all of the applicable fees. For that reason, when you compare loan rates it is essential that you carefully review the total sum of every fee.
What are the fees that are attached to every mortgage? Before you attempt to compare loan rates you have to understand what you are comparing. The fees can include:
· Appraisal fee
· Processing and underwriting fee
· Mortgage insurance premium
· Application fee
· Fee for a credit report
· Tax service fee
· Commitment
· Wire transfer fee
· Any other applicable fee unique to the transaction
Any number of fees can be a part of a mortgage package so it makes sense to compare loan rates in every way that you can. This will help you secure the best deal and save you money in the process!
Compare Mortgage Rates And Locking Them In
January 23, 2010 by · Leave a Comment
When you compare mortgage rates many brokers and lenders will often quote you in good faith in regards to what kind of interest rate and mortgage program you qualify for. You will also be given the opportunity to “lock” in for an interest rate should you qualify.
When a mortgage broker quotes a mortgage rate before receiving all pertinent information from the borrower, the borrower should assume that the rate is not yet locked.
A rate lock and range from 15, 30, 45, and 60 days. 30 days is the most common rate lock, and longer lock periods are available. You may be required to pay additional fees for a longer lock period or if you go past your rate lock expiration date.
A lock, also called a rate lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
Shorter loans, such as a 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
A larger down payment greater than 20% will give you the best possible rate. With a down payment of 5% or less, you should expect to pay a higher rate as you are starting with less equity as collateral. If you’ve got the cash now and want to lower your payments, you can pay points on your loan to lower your mortgage rate. It’s a simple concept, really. In exchange for more money up front, lenders are willing to lower the interest rate they charge, cutting the borrower’s payments. Closing costs are fees paid by the lender, if you do not want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.
Your credit quality and debt-to-income ratio affect the terms of your loan through your FICO Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a good credit report, you will not receive the lowest available interest rate.
On a refinance loan, be sure to factor in the 3-day recission period. Typically, the loan must come out of recission by the lock expiration date or the rate lock will expire.
Depending on the market conditions, you may want to float your rate. To float means you will wait until you are closer to the loan closing to lock your rate. Since there are costs to lock farther away from the closing date, floating can save you closing costs. If the market is favorable, float your rate.
When purchasing a home it is important to make sure that the rate is locked in for a period of time that covers you through your closing date. Often you may shop for a mortgage before you find your home. In most cases until you are under contract for a purchase your rate will be “Floating”, which means it is not locked in.
It is a very good idea to ask for a copy of your rate lock commitment from your mortgage lender or mortgage broker after your rate has been locked. This will provide you with proof that your rate really has been locked and that there are no surprises at the end in regards to your rate being what it should be.
Be careful if you’re doing a refinance and your rate lock is about to expire. There is a 3-day recission period on refinance loans, and the loan must be out of recission before the rate lock expires, or you’ll lose your pricing.
