How to compare mortgage rates by Ken Krell
Now on to some real estate lessons. The biggest issues today in the real estate marketplace are those associated with mortgage financing.
It used to be that we were worried about terms, or location or about many other things. Now were talking about points and rate locks and APR’s. Unfortunately most folks only know enough to hurt them. So now it’s time for this mortgage company executive to set the record straight.
The annual percentage rate (APR) reflects the cost of your loan as a yearly rate. The rate is always higher than the interest rate you’re quoted because the APR factors in the costs of your loan, such as points prepared interest (from the date of closing until the end of the month) and any other costs of credit.
To put it another way, let’s say that you wanted to borrow $100,000, and the cost of the loan is three points (one point equals 1% of the loan amount).
Therefore, you’re paying $3,000 for the right to borrow $100,000. You’re actually getting only $97,000 but paying a loan for $100,000.
Now, even the interest rate on the loan is only 9%, are you paying 9%? Of course not. Since the net proceeds of the loan is less than $100,000, you’re paying a rate higher than 9%.
Now, before you get all the upset about this, nearly everyone pays point. Points are used to help sell a loan in the secondary mortgage market. They help raise the yield to investors and also cover the Lender’s costs of processing the loan in the first place. The important about the APR is that you can use loan programs.
For assistance, which is better- a $50,000 loan at 9% with three points, or the same loan at 9 ¼% with only two points? The only way to tell for sure is to look at the APR. The APR on the 9% loan is 9.342% while the 9 ¼% loan has an APR of 9.505%. Now you can see the true difference between the loans.
By the way, when advertising an interest rate, lenders are required to disclose the APR.
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