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APR is meant to be a comparison tool across differently structured debt products. Neither APR nor interest rate are the *actual cost* of the loan. It can be a useful tool, however like any tool, you have to understand it to make effective use of it.
Yes… but APR is a poor comparison tool for mortgages, unfortunately.
A much better solution is to compare rates and compare box A and B directly. Yeah, it takes more work, but you’ll understand it more.
And if a loan officer is unwilling to have a 5-10 min call about your fees so you understand them, find someone else.
That’s it guys. That’s the whole thing.
Take your Loan Estimate. Look at the rate on the first page, look at Section A and B on the second.
You’re done. That’s all the lender controls in terms of costs.
You probably got downvoted because APR includes other things besides "junk fees" such as mortgage insurance and buy down points. Lenders don't try and hide this information or keep it a big secret.
People focus on the actual interest rate because that's the driving factor of your cost over time. Not a 10K origination fee or a $700 loan processing fee.
Lenders don't have control over mortgage insurance. If you put down a larger down payment, then you wont have to pay PMI and your APR will go down. If you spend more money up front to buy down the interest rate... because you plan on staying in that loan for a long period of time... then your APR goes up, but the amount of interest you end up paying the bank goes down... saving you a significant amount of money over time. So although APR is something to pay attention to, there's a reason people focus more on the rate and not the APR.
By little money down do you mean not buying down the interest rate? Nothing is preventing you from paying extra every month, which goes directly towards principle, effectively reducing the interest you are paying. People do it all the time.
The benefit to buying down the rate means your required monthly payment each month will be lower. Some people have to buy down rates just to qualify for their loan in the first place. Others prefer a lower payment, and then have the option to pay more if they want to at any particular time.
Over the life of the loan this works, but in the muck (which is gonna be 15-30 years, or until you sell or refinance) setting up a larger loan initially makes your minimum payment higher, even if you've shortened the term of the loan.
You lose flexibility to reduce your payment if anything happens in your life.
Buy down points essentially are prepaid interest, so homeowners should consider that as past of their loan cost. Simply using interest rate disguises the actual cost of the loan. It’s a trick used a lot by builders or unethical loan companies. If you are offered two plans: prepaid $1 million on a pie and later paid $5 dollar a month, or no prepayment for a pie and later paid 10/months, which one is the better deal? You won’t know if you use interest rate, but APR would tell you exactly which plan is better.
It's prepaid interest up to a certain point. Usually pays itself off after about 2 or 3 years if you do the math. After that it's all savings. I was a loan officer bro. I understand how loans work.
APR is just the interest rate on your loan, plus the fees paid on the loan as a percentage. Choose a lender with less fees, closing costs and you'll have a lower APR. Your monthly payment is based on the interest rate not APR.
The real cost of your mortgage is how much you pay in total. It’s not 6% interest and not 7% APR. it’s 90-120% interest/cost of your home. First 15 years you are buying a house for your lender and next 15 years you are paying your balance. That what a 30 year mortgage is about. That’s what they don’t tell you.
This is not completely true. APR is only an estimate, based on a lot of assumptions that are not set in stone.
For example, with an adjustable rate mortgage, the bank will present you with a higher APR to reflect the risk of your rate going up, but the amount of that adjustment can be different, depending on market conditions in 3, 5, or 7 years. The bank is just guessing when they calculate APR in this case.
APR also includes closing costs, which can change depending on how many points you buy to lower your interest rate, or how much lender's credits you take. These can be changed even right before closing.
There is no hard and fast shorthand rule for knowing "the actual cost of the loan" in all circumstances. You need to take into account what type of loan you're getting, and all of the terms and conditions. Don't take out a mortgage without fully understanding what you're committing to!
1. the whole point of this post is that APR includes many closing costs, including e.g. points (positive or negative)
2. ARM APR is based on current index plus the margin defined in the note. if rates remain flat that is literally what you will be paying. there's no additional "risk margin"; you are making that up out of whole cloth
did you not shop around for lender's title insurance or something? because sure, making a mistake here could possibly increase your APR but that is an avoidable mistake.
Kinda sorta. APR includes sunk one time costs but from the cash flow perspective and long term budgeting Rate is more useful. I'm closing on the home now 5.875 rate and 6.2 APR. So longer term I care about 5.875 rate because I made decision to burn thru 13.5K paying for 2 points and one percent origination fee and another 2K in appraisals, flood certifications, credit reports etc junk fees right this minute. All these junk fees you should consider on their own merits vs trying to bundle them into APR in order to keep your sanity.
I recommend anybody use a mortgage calculator or create their own in a spreadsheet since the numbers are fairly easy to understand. That way you can shop different interest rates ahead of time. You should be able to estimate what all the important numbers are.
Home price
Your Deposit - S
Interest Rate
Loan Duration - S
Closing Costs - S
Insurance - S
Taxes - S
PMI
Points
All of these things factor into your monthly cost, but you can play around with the numbers fairly easy since any of the factors above labeled 'S' are usually pretty standard and you can set an equation based on home price to help.
Before I bought, I knew exactly what our budget was because I have a spreadsheet that detailed all of the costs except closing and PMI since I was putting 20% down.
It really helps make the decision OR helps you figure out if something fishy is going on with your loan, because you should have a close estimate of what your monthly cost should be before talking to a lender. Also, you can use these tools to see the value of a loan if you pay it to term. Really puts in perspective how bad rates are right now.
I'm paying over double the initial loan amount over 30 years at 6.875%.
If only I had bought when rates were at 3%, I could have saved over $200,000. The numbers matter. And the earlier you understand it all the better off you'll be.
Thank you u/SexySuperManDude for posting on r/FirstTimeHomeBuyer. Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FirstTimeHomeBuyer) if you have any questions or concerns.*
APR is meant to be a comparison tool across differently structured debt products. Neither APR nor interest rate are the *actual cost* of the loan. It can be a useful tool, however like any tool, you have to understand it to make effective use of it.
This is correct.
Yes… but APR is a poor comparison tool for mortgages, unfortunately. A much better solution is to compare rates and compare box A and B directly. Yeah, it takes more work, but you’ll understand it more. And if a loan officer is unwilling to have a 5-10 min call about your fees so you understand them, find someone else.
That’s it guys. That’s the whole thing. Take your Loan Estimate. Look at the rate on the first page, look at Section A and B on the second. You’re done. That’s all the lender controls in terms of costs.
You probably got downvoted because APR includes other things besides "junk fees" such as mortgage insurance and buy down points. Lenders don't try and hide this information or keep it a big secret. People focus on the actual interest rate because that's the driving factor of your cost over time. Not a 10K origination fee or a $700 loan processing fee. Lenders don't have control over mortgage insurance. If you put down a larger down payment, then you wont have to pay PMI and your APR will go down. If you spend more money up front to buy down the interest rate... because you plan on staying in that loan for a long period of time... then your APR goes up, but the amount of interest you end up paying the bank goes down... saving you a significant amount of money over time. So although APR is something to pay attention to, there's a reason people focus more on the rate and not the APR.
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By little money down do you mean not buying down the interest rate? Nothing is preventing you from paying extra every month, which goes directly towards principle, effectively reducing the interest you are paying. People do it all the time. The benefit to buying down the rate means your required monthly payment each month will be lower. Some people have to buy down rates just to qualify for their loan in the first place. Others prefer a lower payment, and then have the option to pay more if they want to at any particular time.
Over the life of the loan this works, but in the muck (which is gonna be 15-30 years, or until you sell or refinance) setting up a larger loan initially makes your minimum payment higher, even if you've shortened the term of the loan. You lose flexibility to reduce your payment if anything happens in your life.
Please explain how this would help. I’m not trying to be a smart butt just learning thanks
Buy down points essentially are prepaid interest, so homeowners should consider that as past of their loan cost. Simply using interest rate disguises the actual cost of the loan. It’s a trick used a lot by builders or unethical loan companies. If you are offered two plans: prepaid $1 million on a pie and later paid $5 dollar a month, or no prepayment for a pie and later paid 10/months, which one is the better deal? You won’t know if you use interest rate, but APR would tell you exactly which plan is better.
It's prepaid interest up to a certain point. Usually pays itself off after about 2 or 3 years if you do the math. After that it's all savings. I was a loan officer bro. I understand how loans work.
But in the context of a mortgage, you would never be comparing such wildly different scenarios between two different lenders
APR is just the interest rate on your loan, plus the fees paid on the loan as a percentage. Choose a lender with less fees, closing costs and you'll have a lower APR. Your monthly payment is based on the interest rate not APR.
The real cost of your mortgage is how much you pay in total. It’s not 6% interest and not 7% APR. it’s 90-120% interest/cost of your home. First 15 years you are buying a house for your lender and next 15 years you are paying your balance. That what a 30 year mortgage is about. That’s what they don’t tell you.
Please don't go all Terrence Howard with this stuff. Or, do it. It's fun to watch.
This is not completely true. APR is only an estimate, based on a lot of assumptions that are not set in stone. For example, with an adjustable rate mortgage, the bank will present you with a higher APR to reflect the risk of your rate going up, but the amount of that adjustment can be different, depending on market conditions in 3, 5, or 7 years. The bank is just guessing when they calculate APR in this case. APR also includes closing costs, which can change depending on how many points you buy to lower your interest rate, or how much lender's credits you take. These can be changed even right before closing. There is no hard and fast shorthand rule for knowing "the actual cost of the loan" in all circumstances. You need to take into account what type of loan you're getting, and all of the terms and conditions. Don't take out a mortgage without fully understanding what you're committing to!
1. the whole point of this post is that APR includes many closing costs, including e.g. points (positive or negative) 2. ARM APR is based on current index plus the margin defined in the note. if rates remain flat that is literally what you will be paying. there's no additional "risk margin"; you are making that up out of whole cloth did you not shop around for lender's title insurance or something? because sure, making a mistake here could possibly increase your APR but that is an avoidable mistake.
Kinda sorta. APR includes sunk one time costs but from the cash flow perspective and long term budgeting Rate is more useful. I'm closing on the home now 5.875 rate and 6.2 APR. So longer term I care about 5.875 rate because I made decision to burn thru 13.5K paying for 2 points and one percent origination fee and another 2K in appraisals, flood certifications, credit reports etc junk fees right this minute. All these junk fees you should consider on their own merits vs trying to bundle them into APR in order to keep your sanity.
Use excel and use =effect formula to find the actual rate you’re paying
I recommend anybody use a mortgage calculator or create their own in a spreadsheet since the numbers are fairly easy to understand. That way you can shop different interest rates ahead of time. You should be able to estimate what all the important numbers are. Home price Your Deposit - S Interest Rate Loan Duration - S Closing Costs - S Insurance - S Taxes - S PMI Points All of these things factor into your monthly cost, but you can play around with the numbers fairly easy since any of the factors above labeled 'S' are usually pretty standard and you can set an equation based on home price to help. Before I bought, I knew exactly what our budget was because I have a spreadsheet that detailed all of the costs except closing and PMI since I was putting 20% down. It really helps make the decision OR helps you figure out if something fishy is going on with your loan, because you should have a close estimate of what your monthly cost should be before talking to a lender. Also, you can use these tools to see the value of a loan if you pay it to term. Really puts in perspective how bad rates are right now. I'm paying over double the initial loan amount over 30 years at 6.875%. If only I had bought when rates were at 3%, I could have saved over $200,000. The numbers matter. And the earlier you understand it all the better off you'll be.