The mortgage process can get confusing. One aspect of the process that will come into conversation frequently is your interest rate and annual percentage rate (APR). Before you consider locking in any rates, get the answers to the 4 most commonly asked questions about interest rates and APRs. Understanding the difference could save thousands.
1. What’s the difference between the mortgage interest rate and the annual percentage rate (APR)?
The mortgage interest rate calculates your monthly mortgage payments. It is the cost of borrowing money. APR is the big picture rate of your mortgage loan. It accounts for the interest rate and all additional costs associated with financing your loan, they may include:
- Discount points
- Closing costs
- Mortgage insurance (if applicable)
The mortgage interest rate and APR are expressed as a percentage.
2. Why is my APR higher than my interest rate?
Because the APR accounts for your interest rate and all other costs of getting your loan, it calculates a new all-inclusive monthly payment. It reflects a broader measure of the costs associated with your mortgage. APR calculations also differ between lenders, some may include different fees for different loan types, causing them to be higher than your interest rate.
3. How should I use these rates?
The mortgage interest rate and APR allow you to compare different loan options on the same metric and calculate what payment works best for your financial situation. If you are more focused on lower monthly payments, the interest rate will be of more importance to you. If you are more focused on the total cost of the loan, the APR will give you a better idea of what to expect through the loan term. In addition, it is important to keep in mind that the APR spreads all costs associated with the mortgage over the life of the loan, so if you do not expect to keep your mortgage for the entire loan term, the APR will not be a proper representation of the rate for your loan.
4. When should I lock in my rate?
The right time to lock in your rate is entirely dependent on your personal circumstances. If you’re shopping for a mortgage, work with your loan officer to discuss what is right for you. You have the ability to lock in a rate once your loan is approved but, generally, homebuyers wait until they have found the home they want to purchase to lock in their mortgage rate. In your searches, you may come across pages and pages of rates and headlines that claim they have the lowest rates, but don’t be intimidated or rushed into something you’re not ready for. Stay educated and get support throughout the process.
Do you know how your mortgage interest rate is determined?
Sources: www.bankrate.com www.bankrate.com (2) www.consumerfinance.gov