The Lowest APR is NOT Always Going to Be The Best Mortgage Deal
One of the first thing a buyer does is shop for the best mortgage and interest rates when looking to purchase a home. This is great news, because you’re on the right track. This is something you definitely should do initially before beginning your house search. However, lenders give borrowers all sorts of loan options.
It can be very difficult to choose one, when you’ve got several different lenders offering you several different rates. It is absolutely overwhelming. Know that this is a trap, and that there is always a “catch” to every transaction or “favor” in life. Do not make the mistake of just going with the lowest APR, or, “annual percentage rate.” Read on: Five Tips for Picking the Right Mortgage Lender.
The APR is not the same thing as an interest rate. Know this beforehand, and you’re already one step ahead! An interest rate is a percentage of the loan that you will need to pay the lender to actually take out the loan. The APR on the other hand, is interest plus any other fees by the lender that they want to add initially, and/or over the terms of the loan. Here is a little more information about annual percentage rates:
Further information regarding APRs:
1. Absolutely no standard exists regarding what the fees that the lender can and can’t include in the APR. When you buy a house, you’ll have to pay closing fees, and those vary depending on what lender you choose for a loan, as well as the loan terms. An APR on its own, cannot tell you what costs are negotiable, and what costs are non-negotiable. See: FORBES How to Choose a Mortgage Lender.
2. The annual percentage rate is calculated by looking at the entire life of the loan. If you don’t plan to stay in the home for more than a few years, you won’t choose the 30 year loan term. Due to this, you’re going to pay a much higher APR than you would if you planned to stay longer as your monthly mortgage payment is spread out when the loan term is longer.
3. The economy is unpredictable, and as such, APR’s cannot adjust to whether or not you’ll refinance your house at some point, move before the mortgage loan term is up, or whether or not you pay your mortgage off before it is due. Also, there are some types of loans other than traditional, that will require you to pay PMI (private mortgage insurance). APR cannot predict when you will stop paying this. Read on: How to Choose the Right Mortgage Company.
4. You cannot compare one type of loan to another. APR’s work in different ways. Because of this, you cannot follow the myth that the APR is the best option. APR’s can be very confusing, and this is a common question among homebuyers. You should instead compare mortgage rate, as well as the lender fees when deciding on a lender, and a mortgage term. You can also choose to compare mortgage rates without closing costs. Sometimes, a seller will cover these costs for you in the contract.
If you take nothing else away from this article, take away the fact that you should absolutely not choose a loan just because it has the lowest APR out of the lending options. Here is a great video to help you distinguish between an APR and the interest rate: