The ABCs of APR
When shopping for a home mortgage, most folks are generally concerned about their interest rate. They glance at the APR, and then disregard it, because they do not understand it. But APR is a really big deal when it comes to agreeing to a mortgage, so much so that ANY changes to it must be disclosed to the homebuyer.
Here are the basics of APR that you should know before closing on your mortgage.
What is APR?
APR is an acronym that stands for Annual Percentage Rate. Put as simply as I can, APR is the true cost of borrowing funds, as it takes into account your interest rate and all the fees incurred over the term of the financing, in this case, the life of your mortgage. The closer the APR is to the stated interest rate (also known as the note rate), the lower the fees and other costs are for your loan.
APR is made up of the note rate of your loan plus any additional fees, usually related to the compensation of the other parties involved in securing your mortgage. Some examples of these ancillary fees include prepaid interest or discount points, origination fees, processing fees, mortgage insurance, and title insurance, just to name a few.
Consider the following scenario: a lender offers a 4% interest rate, lower than all their competitors, but the fine print shows a APR of 6.23. That means there are a lot of added fees in this loan. Thanks to the federal Truth In Lending Act, you can (and should!) immediately ask for a breakdown of fees. Due to this law, APRs can only move a small amount without you having to be notified legally. For example, if you lock into a rate and the APR is 4.23, you don’t have to worry about showing up to closing and find an the APR is now 4.79. You would have had to agree to such a change.
Getting The Lowest APR Possible (& Paying Less Over Time)
- Don’t pay points (unless the seller is going to pay them for you at closing).
- Make additional payments to principal after you close. APR is fluid; the less total interest you pay will lower your APR over the life of your loan.
- Make additional payments to remove mortgage insurance sooner
- Realize that sometimes going with a higher note rate with lower fees will reduce your APR.
To be a savvy borrower, you must be aware of the cost of financing. And be sure to compare APRs between lenders, not just the base interest rate.
No matter what stage you are at in your home buying process, it helps to have someone you can trust, someone that’s in your corner, asking the tough questions and helping you find the right answers. If you’d like to get together and talk about getting your mortgage process started, give us a call at 804-274-1200 or via email: [email protected]. Thanks for reading!