Understanding APR is very important for borrowers who are looking to compare what various lenders are offering them with regard to an interest rate and the loan cost.
APR stands for annual percentage rate and is essentially a tool, which is expressed as a percentage that can help borrowers understand the costs of getting a loan.
The APR reflects not only the interest rate but any points, lender fees, and any other charges you might have to pay for in order to get the loan.
Because of this, the APR is usually higher than your mortgage note rate.
So for example, if you were quoted a 4.25% interest rate on 30yr fixed mortgage loan of $300,000 and you decided to roll in $3,000 in closing costs, then the APR would be 4.33%.
In this scenario, you can see that the APR of 4.33% is higher than the mortgage interest rate of 4.25% because the closing costs are factored into the APR calculation.
Now when looking at APR quotes from different lenders, it’s important to understand that just because a lender has the lowest APR doesn’t necessarily make that loan the best loan for you.
This is because, the APR is the theoretical rate assuming you keep the loan for the full amortization period, which in this case would be 30 years.
So, if you were planning on moving out of your house in the next couple of years or you thought you might refinance at some point in the future, it might not make sense to get the lowest APR possible.
If, for example, you decided to buy the interest rate down by paying what are called “points,” then you’re closing costs would be much higher but your APR would be lower.
In that scenario, buying down the interest rate and getting the lowest APR possible, would make more sense if you were not planning moving out of or refinancing your property at any point in the future
So I hope this video was helpful, if you liked it then feel free to hit the like button below and if you want to see more videos like this then feel free to hit the subscribe button below.
For now, I’m Ryan from Mortgage Philosopher.com.