Your mortgage can be visualized as a comprehensive financial package. It involves a consistent monthly payment towards your home loan until it's fully paid off. However, this payment comprises various expenses such as the principal, interest, homeowner's insurance, among others. To ascertain the total expenditure associated with your mortgage, it's essential to consult with a lender to discuss your present financial status and evaluate your loan requirement. Two critical aspects that you'll come across in your mortgage discussions are the annual percentage rate (APR) and the interest rate.
Interest Rate and APR: A Comparative Analysis
Typically, Americans stay in the same home for approximately 13.3 years before considering relocation. Consequently, the home buying process may seem overwhelming due to the unfamiliarity of terminologies. This is where our expertise comes in handy. The interest rate represents the cost of borrowing the principal loan amount (the money you borrow). It can either be fixed or variable, but it is consistently represented as a percentage.
Contrarily, the APR comprises the interest rate in addition to other expenses such as fees, discount points, and certain closing costs. In simpler terms, it provides a comprehensive representation of the cost of a mortgage. Much like the interest rate, the APR is represented as a percentage.
Upon applying for a home loan, your lender will present a Loan Estimate. Often, the APR exceeds the interest rate due to the incorporation of additional fees. The APR serves as a valuable comparison tool. Variables like interest rates, loan fees, and points can differ among lenders and loan programs. Therefore, the APR offers an accurate comparison between different loan products. Consider comparing a loan's APR with its advertised interest rate. An APR that is notably higher than the interest rate could signify additional costs attached to the loan.
Implication of APR and Interest Rate on Your Mortgage
The interest rate determines your monthly mortgage payment. The APR, on the other hand, provides a comprehensive measure of the total cost of a loan. Consider the following scenarios:
If you intend to live in your house long-term with no immediate plans to relocate, it might be beneficial to opt for a 30-year fixed-rate loan with the lowest possible APR. This approach will result in lower total payments over the 30-year term.
If you aim to own a home without committing to a specific location, it may be more cost-effective to pay fewer upfront fees at a higher rate, and a higher APR, especially if your stay in the home will be relatively short-term. Consequently, the total cost will be less over the shorter duration you spend in the house.
For any further questions or concerns, we are here to assist you. Get in touch with a CrossCountry Mortgage Advisor today for a complimentary consultation.
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