When you’re shopping for a loan, the first thing you look at is the interest rate. It’s an important figure, certainly, but it should not be the last thing you look at.
Even with interest rates attractively low, an eighth of a percentage point higher or lower can mean thousands of dollars spent or saved over 30 years. (To put today’s rates in perspective, fixed interest rates on 30-year loans saw a low of 3.31% in 2012 and a high of 18.63% in 1981. For details, see this Freddie Mac chart of rates from 1971 to the present.)
Before you sign anything, make sure you understand the full cost of the loan. That figure, known as the annual percentage rate (APR) includes the amount you pay in interest plus any additional fees, points, or other charges associated with the loan. The APR is a more accurate calculation of your actual payments over the life of the loan.
Naturally, your Sente Mortgage loan officer will be happy to explain the difference between interest and APR, and show you where the two figures appear on your Loan Estimate form. Meanwhile, here are a few more details.
In addition to the interest rate (expressed as a percentage), the APR includes the following:
- Points. Each point is 1% of the loan amount, and there are two types of points:
- Origination points. This is a fee charged by the lender that originates the loan.
- Discount points. This is a portion of the interest that the borrower prepays in order to secure a lower interest rate.
- Fees. Amounts included in the APR may include other origination fees as well as fees for appraisal, attorney, credit report, flood certification, survey, postage, etc.
- Taxes. In some states, the APR includes mortgage tax and state and local transfer taxes and fees.
When the points and fees are added to the interest rate, the APR gives a more realistic picture of the borrower’s cost over the life of the loan. (Note that calculating APR for adjustable-rate mortgages is different than for fixed-rate mortgages.) Of course these are not your only costs. You’ll have insurance, taxes, improvements, and possibly local homeowners’ fees to add to your budget.
Shopping for the lowest APR may not always be the best choice. For example, home buyers who expect to stay in their home for a shorter time may find that a slightly higher APR will save them money. The important figure here is the break-even point. Ask your mortgage banker to explain this important calculation or read this article on refinancing.
Borrowing is important but it does not have to be complicated. Talk with a local Sente Mortgage loan officer today to discuss your needs and borrowing options. Give us a call any time.