What is “APR” (Annual Percentage Rate), when is it useful and when is it not useful?
APR is simply one of many measurement of the cost of your loan and it may not be the most accurate measurement in your situation since it is calculated a borrower will pay over the life of the mortgage term.
Kevin Martini, Certified Mortgage Advisor
WHAT IS APR?
The federal government requires all Raleigh mortgage lenders to disclose the “annual percentage rate” (APR) whenever they advertise a loan program. APR is calculated by adding some of the costs you pay at closing to the total interest that you’ll pay over the life of the mortgage. An annual interest rate, (a.k.a. APR) is then calculated based on that total number.
What included in APR calculation?
Origination Charges and Points, Processing and Underwriting Fees, Mortgage Insurance (monthly and upfront), Closing Agent Fees Retained by Mortgage Company, or Closing Fees in Excess of What You’d Be Charged if You Paid Cash, Tax-related Service Fees, Administrative and Wire Transfer Fees, Pre-paid Interest
What is NOT included in APR calculation?
Application Fees, Appraisal Fees, Credit Report Fees, Title Fees & Title Insurance, Pest or Flood Hazard Inspection Fees, Stamp and Transfer Taxes, Pre-paid Escrows for Taxes, and Insurance
WHEN IS APR USEFUL?
When you’re trying to compare two loan programs that may have different interest rates and/or closing cost scenarios, APR can help you turn the scenarios into an “apples-for-apples” comparison. For example, if one loan has a higher interest rate and lower closing costs, is that a better deal than another loan program with a lower interest rate and higher closing costs? Comparing the APR on both programs may be useful in that scenario.
WHEN IS APR NOT USEFUL?
The main problem with APR is that it doesn’t take into account how long you will keep the mortgage. Most people don’t keep the same mortgage for its entire term of 30-years. Chances are that you’ll probably refinance or sell your home at some point before the loan ends in 30-years. Therefore, when you compare your mortgage options, it’s probably smarter for you to look at what your total costs will be over 5, 7 or even 10 years vs. focusing entirely on comparing the APR. Remember, APR is simply one measurement of the cost of your loan and it may not be the most accurate measurement in your situation.
CERTIFIED MORTGAGE ADVISOR KEVIN MARTINI BOTTOM LINE
Your mortgage is most likely your single largest debt, and your home is most likely your single largest investment. APR may not be the proper metric to measure is you have the lowest cost of borrowing. The best way to avoid traps and make smart choices is to work with a Certified Mortgage Advisor with the Martini Mortgage Group. Contact us so we can get started!
