Using APR to Get At the True Cost of A Mortgage

Written by: Scott Sery

When many people think of APR they are really thinking of the interest rate on their loan.  The Annual Percentage Rate actually takes into consideration more than just the interest, but all the fees associated with getting a mortgage.  It will consider all the up-front fees, including closing costs and points, and amortize them over the lifetime of the loan.  What the borrower gets is a much more accurate picture of the true cost of a mortgage.  Thanks to the Federal Truth in Lending Act, the APR is required to be disclosed upfront.

When figuring the APR on a loan, the borrower must look at many different factors.  First, they need to see what the interest rate is.  This will be the primary addition to the APR.  Figuring in loan origination fees, points purchased to get the interest to that rate, private mortgage insurance (if required), closing costs and any prepaid interest (usually this is found in the points a person buys) the borrower can then accurately determine what the APR is on the loan.  So when they are comparing to loans, and each are offering different interest rates, they can determine which is actually offering a better deal.

While it is federally mandated that the lender disclose the APR to the borrower before they sign any papers, there may be times when the borrower wants to calculate things out on their own.  The easiest way is to use a mortgage APR calculator.  The only thing the borrower needs to know to use one is how much he or she will be paying with all the fees.

There are times when a higher APR is actually better than the lower APR.  Since upfront fees are amortized over the life of the loan, those who do not plan to be in their house for more than a few years might benefit from paying less up front and a slightly higher APR.  For example, if the higher APR costs $25 more per month, but the lower APR costs $2,500 more up front, then it will take 100 months to recoup the costs.  If the homeowner plans to move in 8 years or less, they would be better off to pay more per month, and save their cash on hand.

The interest rate is a huge part of the mortgage.  However, it is not the only part.  These are complex loans, and have many different fees and payments attached to them.  By considering all the payments, and realizing that APR is different than interest rate; the borrower can understand fully what lender is offering the better deal.  The Truth in Lending act just makes the borrowing process that much easier.


Using APR to Get At the True Cost of A Mortgage

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