Hopefully this post will help you to understand more clearly what APR means and why it is important for finding the right loan for you.
There are countless lenders in the market and most of these lenders offer similar products(loans) but they can vary greatly in cost, rate, term etc. How does a consumer decide between 1 vs the other? One of the most overlooked yet extremely important comparative tools is the APR.
APR is an acronym for Annual Percentage Rate. The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.
Lets unpack what that means in laymen terms. With any type of loan the borrower is extended credit(cash) and given a plan of repayment in order to complete their obligation to the lender. With many loans there are costs associated with the loan itself based upon the loan program, interest rate chosen, and some of those lender/loan officer specific. A consumer has been given APR as a way to compare apples to apples. The APR expresses to the borrower what the interest rate is plus the fees and or additional costs associated with that rate.
For Example: A consumer is shopping for a 200,000 loan for a 30 yr mortgage and gets 2 quotes
Quote 1) Consumer is offered a 5% rate with $2000 total in fees
Quote 2) Consumer is offered 4.5% rate with 1 pt discount of ($2,000) plus an additional $6000 in expenses.
Both are the same loan amount and 30 yr term. How does a borrower decided what is the best scenario for their family?
Quote 1) = 5.089% APR
Quote 2) = 4.852% APR
This would mean that on the full term of the loan quote 2 would be the better choice for the consumer. But this option assumes a borrower keep the same loan for the full term of the loan. That is where the borrower has more things to consider. How long do you plan on staying in the home? If you have a plan to move in 2 yrs does it make sense to pay the extra expenses associated with the lower rate. Lets check: Scenario 1 has a payment of 1074.64, Scenario 2 has a payment of 1013.37. If the borrower moves in 2 yrs that means they have 24 months of payments saving $61.27 per month = $1470.48 total savings. So in this example a borrower would choose quote 1 since it would not make sense to pay $6000 in expenses to save $1470.
Not all loan expenses are taken into the APR calculation: It does not take into account certain charges, including non-refundable application fees, late payment charges, title insurance premiums, and fees for title examination, property appraisals and document preparation.
Whenever you are quoted an APR on a mortgage and you’re serious about pursuing that offer, ask to see the lender’s Good Faith Estimate (GFE). The GFE is a list of all the fees that would be charged to provide you a home loan, including the charges that would otherwise not be included in the APR. Lenders are required to provide this information without any commitment from you. Your home loan is probably the biggest financial liability you’ll ever take on in your lifetime, so make sure you are informed and not paying any more than necessary.
For more questions Email me at Dale.entrekin@spm1.com
Home Lending San Diego 