Mortgage interest rates are at historic lows for the past several years and it’s all over the news. When you shop and get loan estimates from several mortgage lenders, you’ll come across two important figures that are both expressed in percentages: mortgage interest rate and annual percentage rate (APR). Understanding the difference between the two can help you make better decisions when choosing between buying a home or refinancing.
Mortgage interest vs APR in a nutshell
There are a few good reasons why the mortgage interest rate is on the first page of the loan estimate and the APR on the last page. First, the mortgage interest rate is the advertised cost of borrowing the principal, while APR is the overall cost of borrowing the money (including the mortgage interest rate the lender charge you). Second, the factors that affect interest rates and APR are different. An interest rate could increase or decrease depending on the lender, market condition, credit score and down payment. APR, on the other hand, could increase or decrease depending on the broker fees, closing costs, discount points and any other fees that you need to pay for processing the loan you’ll take.
How do you get the best deal from lenders?
Mortgage experts often advise to shop for several lenders and compare loan estimates to get the most favorable deal. In most cases, choosing a lender with the lowest APR is worth considering if you get the same interest rate from other lenders because the APR shows you the overall cost of borrowing money. However, if you’re taking out an adjustable-rate mortgage, or ARM, take note that the APR does not reflect the highest interest rate of the loan. The interest rate in ARMs oftentimes increase unlike in a fixed-rate mortgage.
When comparing APRs between different loan estimates, make sure to ask and understand all the associated fees that you’re supposed to pay. You may also find it ideal to search on the average fees that lenders charge in your state to determine if they’re charging you excessive fees. For example, appraisal fees could cost from $300 to $450, and pulling your credit report could cost you around $25. Some lenders may even charge you additional fees that are often unnecessary. Also, if you have plans of repaying your mortgage in full before maturity, find out how much prepayment fees you’ll be paying. If a lender offers you a loan with a low interest and low payments, find out if you’ll be making balloon payments later on. Having a better understanding of the fees in the APR before signing on the dotted line could help you avoid predatory lending.
Things you can do to improve the offers you get from lenders
When you shop for a mortgage, there could be times that you might think lenders are charging you a high interest rate. That’s because lenders offer interest rates based on the borrower’s risk of taking the loan. If you want to secure the most competitive interest rate a lender could offer when buying a home, you may consider improving your credit score, increasing the amount of your down payment, or choosing a shorter loan term to help you get the most favorable interest rate.
When refinancing a mortgage, lenders typically offer you an interest rate based on your credit score. This is why it’s important that you thoroughly review your credit reports before you shop for a mortgage. The interest rate you get may also vary depending on the refinancing option you would choose. For example, refinancing to shorten your loan term could help you get a favorable interest rate. You could get a different interest rate if you’re refinancing to cash out on your equity.
In most cases, APR can help you determine the overall cost of borrowing money when buying a home or refinancing including the mortgage interest rate, which is the cost that the lender charges you for borrowing money. When shopping for a mortgage lender, it’s important that you understand all the associated costs before signing on the dotted line.