Just because you can find information about mortgage interest rates online, doesn’t mean the rate you see will apply to your home loan application. Remember, there are many factors that can influence your individual rate and closing costs. What’s more, most people tend to think of the mortgage rate but not the annual percentage rate (APR), which is what actually determines the total cost of your loan.
So, before you make any conclusions about interest, here are some answers to four of the most commonly asked questions about interest rates, questions that, by the way, your lender should be able to answer.
What Are the Differences Between the Mortgage Interest Rate and Annual Percentage Rate?
The mortgage interest rate is important because it determines your monthly mortgage payments. Basically, it’s the cost of borrowing money. On the other hand, the APR is the overall rate of your home loan, and includes the interest rate plus additional costs of financing your loan, such as:
- Processing fees
- Loan origination
- Closing costs
- Mortgage insurance
Many lenders like to make a big deal about low mortgage rates to entice potential homebuyers to take out a loan. What they don’t talk about so much is the APR, which is the true cost of the home loan. A lower mortgage interest rate might mean lower monthly payments, but a higher APR means you’ll end up paying more money in the long run.
My APR is Higher Than the Interest Rate, What Gives?
Again, the APR includes your interest rate and all other costs of financing your home loan, hence the higher, all-inclusive monthly payment. APR calculations can vary widely between different lenders. Some will include a wide range of fees, depending on the loan type, causing the APR to be higher than the advertised mortgage interest rate.
How Do These Rates Affect My Choice of Loan/Lender?
Both the mortgage interest rate and APR will let you compare different loan options and determine which payment matches your financial capabilities. As mentioned earlier:
- If your focus in on lower monthly payments, keep an eye on the interest rate.
- If you want to save more money over the long run, keep an eye on the APR to know the total cost of the loan.
It should be noted, however, that the APR distributes the financing costs of the mortgage throughout the life of the loan. So, if you’re not looking to keep your mortgage for its entire term, the APR will not provide a proper calculation of your loan rate.
When Should You Lock a Mortgage Rate?
This is entirely dependent on your situation and financial circumstances. Talking to a mortgage advisor or loan officer is a great way to determine which rate is best for your needs. Although you can lock in a rate after pre-approval, most homebuyers wait until have actually found a home they want to buy.
Just remember that as you hunt for a mortgage, you can expect to see many lenders promising the lowest rates. Either way, don’t be pressured to rush your home loan application. Take the time to make an informed decision and get support if you don’t quite understand the mortgage process. When in doubt, get in touch with mortgage advisor Chris Lamm for a consultation.