What is APR and How Does it Affect Your Mortgage?
The annual percentage rate (APR) is a term you’re likely to encounter while reviewing your mortgage options. Thankfully, it’s not difficult to understand—but what is APR exactly? Knowing how the APR works can help compare different loans to help you get the best deal possible.
What Is the Annual Percentage Rate?
When many people compare loans, they often look at just the interest rates to see which loan would allow them to pay the least amount in interest. However, comparing interest rates doesn’t give you the full picture of how much your loan is going to cost. Alternatively, comparing mortgage APR vs. rates will determine the complete cost of your loan.
Instead of focusing solely on the interest rate, look at the mortgage APR vs the rate. The mortgage APR tells you the full cost of the loan you are considering because it includes the interest rate, and lender fees as well, which gives you a more comprehensive cost prediction.
Although different lenders charge different fees, the following are some common fees that are included in the APR:
- Discount points
- Loan origination fees
- Private mortgage insurance (PMI)
How Does the APR Affect Your Mortgage?
If you are approved for a mortgage, you will repay it with equal monthly payments (if the interest rate is fixed). In addition to repaying the money you borrowed (the principal), your monthly payments will also include interest.
The APR can help you determine the total cost of your loan. The higher the APR, the more your loan will cost. An online mortgage calculator can help determine that. Just enter the loan amount, interest rate, and other information to see how much you will have to pay over the life of your loan.
Where Can You Find a Lender’s APR?
Finding a lender’s APR is very easy, and there are several places to look for it. Lenders are required by the Truth in Lending Act of 1968 to display their APRs conspicuously in their branches where they can be easily found and seen.
You can also find the APR listed on a lender’s website under each loan it offers. It can also be found in important documents including the loan estimate, lender disclosures, and closing paperwork.
A Practical Example
The following is a hypothetical example of how the APR can be used to compare mortgages. This will illustrate how easy it is to use the APR to see which loan is the best deal.
Consider the following mortgages for a $300,000 loan with a term of 30 years:
In this case, the third loan option, which happens to have the highest rate but lowest fees, would be the best deal. Keep in mind that for APR purposes, loan fees are spread out over the entire term of your loan, which in this case is 30 years.
In the event you pay your loan off early any lender fees will be spread over a shorter time so there may be instances where selecting a loan with lower fees may make sense even if the APR on that loan is slightly higher. For example, if you refinance or sell after only a few years, the fees paid to obtain the loan be spread over a shorter amount of time.
How to Get a Low APR
The lower your mortgage APR, the less expensive your mortgage will be. Even just a small difference in the APR could make a big difference in how much you will pay over the life of the loan.
Thankfully, there are some things you can do to get the best APR possible on your home loan. Be sure to consider these things before you apply for a mortgage because the total savings could be significant.
Have a Good Credit Score
An important way to get a good APR is by having a strong credit score. Your credit score indicates how well you managed your debts in the past. Higher scores are better. Lenders reward those with the best credit scores with the lowest interest rates.
Make a Bigger Down Payment
If you can make a down payment of at least 20% of the value of your home, you won’t be required to purchase private mortgage insurance (PMI). The cost of PMI varies but is usually between 0.2% and 1.86% of the loan amount each year. Your actual PMI rate will vary depending on credit, LTV and DTI (debt-to-income ratio).
If your loan is for $300,000 with a PMI of 1%, for example, that comes to $6,000. By making a down payment of at least 20%, you can save up to $3,000 or more each year.
Get Your Mortgage from a Credit Union
One of the easiest ways to get a great APR is to apply for a home loan with lenders that offer the best rates—like credit unions. Unlike banks, which are for-profit organizations, credit unions are nonprofit organizations that are primarily concerned with the needs of their members, as opposed to making a profit. That’s why their fees and rates are usually lower than other lenders.
Mortgages with TEG Federal Credit Union
Understanding the difference between APR and Interest Rate will help you better compare loan programs to decide what loan is best for you. Our mortgage loan officers can help you decide if paying Discount Points makes since for you, based on APR as well as how long you intend to keep your mortgage. The APR gives you the total cost of your mortgage. To get the best APR on a home loan, consider getting your mortgage through a credit union, like TEGFCU.
If you are a first-time home buyer, TEGFCU offers home loans with low rates, flexible terms, and low closing costs. Additionally, our mortgage loan officers can connect you with programs that assist first-time home buyers.
Click below to learn more about our loans for first-time home buyers.
To best serve our members, TEGFCU also offers other mortgage options to make sure we match you with the best home financing option for your needs.
Click below to learn more about our home loan options.