When searching for a home loan (mortgage) or refinancing an existing mortgage, it is confusing to compare one loan to another. We all want to get the best deal. One might think the loan with the lowest advertised interest rate would always be the best option. Unfortunately, that is not always the case. How does one compare one mortgage to another? When shopping for a loan you will be given a few sets of numbers by your loan officer. Let’s go over what numbers you should be looking at.
When buying real estate and applying for a new loan, you will want to find out two different numbers. What is the interest rate and what is the annual percentage yield (APR). The terms APR and interest rate are related but distinct concepts. One loan originator might give you a lower interest rate but their APR is higher. Which is better for you? Details matter when dealing with large sums of money.
Of the two terms, interest rate is the more straightforward term. The interest rate on your loan is expressed as a percentage, at which the lender charges you (the borrower) for borrowing money. It reflects the cost of borrowing on an annual basis. The main drawback is that it doesn’t account for other fees associated with the loan. Some loans will try to entice you with a lower interest rate number to get you to go with them. The more important question to ask is: what is the APR on the loan?
The APR or annual percentage yield will also be expressed as a percentage, but it provides a more comprehensive view of the cost of borrowing money through that institution. The way the APR is calculated is that it includes the interest rate plus it bundles all the fees associated with your loan and factors them in spread out over the term of the loan. The important part is that every loan has to calculate the APR the same way. Doing so lets borrowers to be able to use this number to compare one loan to the next. This makes it a better measure of the true cost of a loan or credit. Every loan has different fees depending on the lender. Some of the fees that can be included are the application fee, credit report fee, wire fee, loan origination fee, mortgage insurance fee, and e-mail fee. To be clear, the APR includes the interest rate + all fees associated with getting the loan and “annualizes” that into one all-inclusive rate or percentage.
The next time you are looking for a home mortgage, pay attention to the APR on the loan and not just the interest rate. The APR gives you a fair comparison of the total costs to borrow the money. The APR is truly a more accurate number of the true cost of the loan. A lower interest rate might seem attractive, but a higher APR could mean that you are paying more in the long run.