The Annual Percentage Rate, or APR, is how much fees and interest you will pay when you obtain a mortgage to buy your house. The other fees are important because your interest rate is a set percent (with traditional mortgages) but that is not where the costs end. This is why Stafford home buyers need to understand the APR.
Some Stafford home buyers think of the APR as the actual amount they pay because it includes closing costs, points and private mortgage insurance (if that is needed). The APR also makes it easy to compare loan rates between different lenders because it is an “apples to apples number.” Used in this manner, it can be a good way to see if a lender is hiding fees or going to have additional costs.
Just because it says the APR includes fees, there are some fees that aren’t included in there. For examples, costs like title insurance, credit report, appraisal and transfer taxes are not included in the APR number. However, those are typically smaller costs when you are looking at the total overall cost of the loan.
It is always important for Stafford home buyers to look at both numbers so you can get the best loan. If home buyers only look at the interest rate, you might not see all of the fees attached to the loan. If you only look at the APR, you could miss out on a lower interest rate.
The fees included in the APR are all paid at closing. But the interest rate is yours for the whole life of the loan which could be 30 years.
Are you having a really hard time trying to decide between two loans based on the loan interest rate versus the loan APR? Your financial situation can help pick which loan is best for you.
For example, if you need the cash for a down payment, you might need a slightly higher interest rate with less fees up front. That will give you the most amount of cash to bring to use as a down payment instead of paying that money in fees.
All loans have a break even point where the amount you save in interest evens out with the amount you pay in fees. If your break even point is longer than you plan to stay in your home, it might make more sense to go with the higher APR.
If you have the cash on hand and would like a lower payment for your mortgage, it is definitely to your benefit to shop around for the lowest interest rate and not take the APR into as much consideration. The lower interest rate will save you money over time, especially if you plan to stay in your home long term.
In the end, to get the best deal on a home loan, you’ll want to look at the interest rate, APR, and any details you can get about what fees have been included (or perhaps more importantly, not included) in those numbers. Armed with these options, Stafford home buyers can create a payment schedule that best suits their specific situation.