Annual Percentage Rate (APR) is not the interest rate on your mortgage and does not impact your monthly mortgage payments. So what is it? APR represents both your interest rate and the points and closing fees associated with your loan transaction.
When the same types of fees are being reported across lenders, APR allows you to see which lender is charging the least amount for the same interest rate. If you hear or see an ad for a really low interest rate, but the APR is higher, then there are fees or points associated with that interest rate.
While you are shopping for mortgages, lenders may not be able to report all fee estimates with their advertisements. Obtain a loan estimate to see interest rates, points, fees, and APR. What can impact the closing fees? Property type, third party fees, type of loan, loan amount, etc.
Interest Rate, also known as the note rate, is the recurring cost to borrow money from a lender and does not include closing fees associated with your loan transaction. The interest rate does impact your monthly mortgage payments.
Interest rates on mortgages can be fixed or variable. Fixed interest rates stay the same for the life of the loan. Variable interest can change during the life of the loan and can be found on Adjustable Rate Mortgages.
Is a lower interest rate always better? That depends on your financial goals, current loan scenario, and the cost to obtain such an interest rate.
Points, also known as discount points, is a cost or credit calculated as a percentage of your loan amount. One point is equal to one percentage of the loan amount.
The amount of points paid can impact both your total cost for the mortgage transaction and monthly payment. Lower interest rates will cost more in points and higher interest rates will cost less in points.
Paying points for a lower interest rate is also known as buying down points because you are spending money to lower your interest rate. This is generally best to do when you plan to stay in your loan for a long time. If you refinance or sell your home too soon, you may not have gained the financial benefit of paying for a lower rate.
If you plan to refinance or sell your home in the future, it may be more beneficial to lower your costs up front and go with an interest rate with no or low points. Your One True Loan advisor will help review your financial goals so you can decide if a low interest rate or low cost loan is better for you.