If you’re in the market to buy a new home, you’ll most likely need a mortgage. Let’s be honest— with fixed rates mortgages, adjustable rate mortgages and an APR, shopping for a mortgage can be a little bit overwhelming. It’s an exciting time in your life, but with so many financing options it can be hard to determine what’s best for you.
Understanding all of your options is the first step to finding the best mortgage and that begins with learning the ins and outs of all the terms associated with buying a home. One of the most important terms homeowners need to know is associated with the rate they’ll be paying when borrowing money.
What Is an APR?
An annual percentage rate is the actual yearly cost to homeowners (or any other type of financial lending product such as credit cards and loans) over the term of a loan when borrowing money. It includes so much more than just the interest rate on the mortgage loan. It also takes into account the points, mortgage broker fees and other charges that you have to pay to get the loan.
It’s also usually higher than your interest rate. The interest rate is often the advertised percentage rate and only represents the yearly cost to homeowners when borrowing money. The APR on the other hand, represents the overall cost of borrowing including fees or any other charges you may have to pay for the loan.
Why APR Matters
It is required by law for all lenders (including mortgage, loan and credit card companies) to clearly communicate the costs to clients including the interest rate and overall APR before entering into an agreement. The last thing homeowners want is a surprise in the costs after being approved for a loan when refinancing their current mortgage or purchasing a new home.
As an example, a credit card company may advertise a 1% monthly interest rate for all purchases on their card. However, that can be misleading. They will also need to clearly state the APR to customers before any agreement is signed. In this example the APR is 12%, 1% x 12 months.
Why Understanding APR Is Important
It’s important for homeowners to ask questions, read the fine print and understand their loan before signing. This includes the interest-rate structure, transaction fees and late penalties. The APR provides borrowers with a bottom-line number they can easily compare when shopping for rates and comparing offers between lenders.
Figuring out the interest rates and costs of the APR with your mortgage can be confusing. Talk to a professional to get advice on how to make the best decision for you and your family.