What Mortgage Apr Means What In Mortgage

What does apr mean for mortgages?

The APR allows you to compare the real cost of home loans.

When you apply for a mortgage, the federal government requires lenders to disclose both the interest rate on the loan and the annual percentage rate, or APR. For mortgages, the APR is a measure of the amount of interest you pay on a loan after considering all fees and costs. This allows you to compare different loan products with different fees and costs to determine which one will cost you the least over the life of the loan.

definition

The mortgage APR measures the effective net cost of borrowing. The APR calculates the APR that you would pay on the loan once the cost of borrowing was taken into account. The costs included in the calculation of the APR include points, the issue fee and mortgage premiums. The APR does not take into account factors such as mortgage application fees, late payment fees, title insurance, property appraisals, or document preparation.

APR vs. interest rate

The interest rate on a mortgage is simply the amount of interest the lender will charge you for the loan. The mortgage APR includes the interest rate as well as other fees and costs. The APR helps you determine what the total cost of the mortgage will be. For example, Bank A could offer a 30-year fixed-rate mortgage for $ 150,000 at 6.5 percent interest and $ 5,000 in fees, while Bank B might offer the same mortgage at 6.25 percent interest and $ 7,000 in fees. Bank A's loan has an APR of 6.83 percent, while Bank B's AP is 6.71 percent. So while the upfront cost of the Bank A loan is lower, the Bank B loan will cost less in the long run.

APR restrictions

Knowing the APR you can compare the real cost of different mortgage loans, but it has limits. For example, not all fees and costs associated with a mortgage are included in the APR. You should always consider the full closing costs when deciding which loan to take. In addition, the APR always assumes that you will keep the loan for the entire term. If you are planning to sell the home or refinance it after a few years, a loan with high fees and costs can end up being more expensive than the APR suggests. The APR is most useful for fixed-rate mortgages. This is because the APR on adjustable rate mortgages is based on predictions that can be very inaccurate.

Considerations

Finding the best loan for your situation is not as easy as choosing the lowest APR. Everyone is different. For example, you may not have a lot of money to spend upfront, so a loan with a higher APR but lower upfront fees might be better for you. You may also want to compare the monthly payments you would have to make for different loans. If the monthly payments are similar and you don't plan on keeping the loan for more than five or 10 years, a lower APR may not save you money.

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Author: Fannie Francis

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