When obtaining a mortgage many times consumers are confused about the Mortgage loan APR versus the Interest Rate on their mortgage. The APR or Annual Percentage Rate is a way to compare different options and mortgage offers for a consumer. The idea behind APR is to help consumer shop for the best deal when looking for a mortgage or other types of financing.
Mortgage loans come with a single APR, it is calculated by looking at the total loan amount then adding any “Mortgage Loan APR Fees” examples of these fees are discount points, Underwriting fees, Origination fees and some title fees are APR fee’s. If you pay mortgage insurance that is included in the Mortgage Loan APR calculation also.
Below is an example of how the APR is calculated:
Loan amount is $250,000 for a 30-year fixed with an interest rate of 4.5% fixed.
The Principal and Interest payment for this would be $1,266.71.
In this scenario let’s say the Mortgage Loan APR fee’s total $5,000.00. Take the $250,000 loan amount plus the $5000 in APR fees for a total cost of $255,000.00 the monthly payment at 4.5% interest rate on this is $1,292.05.
To figure out the Mortgage Loan APR we need to put the loan amount back to $250,000.00 and then figure out what interest rate would make the payment equal $1,292.05. In this case the Mortgage Loan APR equals 4.67% this is the rate that makes the payment $1,292.05.
By using the APR, you can then compare different loan offers for a $250,000 loan amount with each other. The lower APR will have the lower costs over the life of the loan.
Note: Taking the lowest Mortgage Loan APR doesn’t always make the best financial sense. You need to consider how long you will be in the home or the mortgage. The APR spreads the cost of the fee’s over the life of the mortgage. Thus, the shorter your stay in your home the more money you can save by taking a higher APR which comes with lower fee’s. Understanding the basics of APR can help make you more financially savvy and save you money when you obtain financing.