Securing a mortgage today requires careful consideration of all the figures. Biggest numbers most consumers pay attention to include loan amount, interest rate, closing costs and the most scrutinized, the annual percentage rate. APR for short, is a disclosure item required loan advertisements and at loan application. Set forth by TILA (Truth In Lending) and overseen by the Fed, APR is touted as most accurate barometer to compare mortgages. In comparing offers, there is often times false distinctions made between APR and interest rate that can creates clout around the financing terms.
Quick Finance Terms To Understand:
Annual Percentage Rate (APR): is a function of blending the closing costs associated with the loan transaction and re-amortizing that figure over the term of the loan.
Interest Rate: is the actual interest rate tied to the amount of money being borrowed. Also called a “note rate”, it is what determines the amount of interest you’ll pay over the life of the loan on an amortization schedule.
Facts About Mortgage Annual Percentage Rate
Fact: The annual percentage rate does not determine the mortgage payment. This is determined by the note rate.
Fact: Lenders must disclose the annual percentage rate on their loan disclosures within three days after submitting a mortgage application.
Fact: The APR is usually within a .125% range above the note rate. This is positive because it is an indicator your closing costs are very small in relationship to the amount being borrowed and the interest rate (note rate) you are receiving.
Fact: If the APR is substantially over the .125% range above the note rate, this is an indicator of higher fees (closing costs) associated with amount borrowed.
Fact: The APR is higher than the note rate because the APR takes into consideration an averaging of the interest rate and closing costs over the loan life.
Fact: APR is not paid over the term of the loan (e.g. 360 months representing a 30 year fixed rate mortgage), the note rate is the interest rate paid over the term of the loan.
Fact: After the mortgage is consummated, the APR is not any monthly mortgage statement nor on the actual note between you and your mortgage lender.
Fact: APR represents the total cost picture in securing a mortgage, not the total interest paid over the life of the loan.
While APR is the standard mortgage comparison disclosure, it is not the only way to compare quotes.
Consumers rather than trying to figure out the intricacies of APR, could be better served by comparing the following items to determine what mortgage choice is most appropriate for their situation.
- Loan term
- Interest rate
- Closing costs
- One loan term versus another
- Closing costs recapture (determined by taking amount of closing costs divided by payment savings)
*Financing Tip: the mortgage with the financing terms most consistent with your long-term goals and objectives is the ideal direction to take.
If you would like to compare mortgage offers, or have a general question about the annual percentage rate, contact Scott.Sheldon@nafinc.com. You can also receive a complementary, no obligation mortgage rate quote for your next home loan.