Getting ready to buy a home? One of the less exciting, but most important things to understand is mortgage APR.
Short for Annual Percentage Rate, APR gives you the real picture of how much your mortgage will cost you over time.
Think of it like your ultimate comparison tool for finding the best mortgage deal.
Simplifying APR: Your mortgage comparison tool
When you’re choosing a mortgage, you’re not just picking a number. You’re choosing what your monthly payments will be and how much you’ll pay over the entire life of the loan.
With APR, you see the big picture:
- The basic rate: This is the interest rate, the percentage you pay for borrowing the money to buy your house.
- The extra stuff: Lenders often add on fees for things like loan processing, paperwork, etc. APR combines all of this to show you the complete cost.
Why APR makes a difference
Let’s imagine you find two mortgages with similar interest rates:
- Mortgage A: 6% interest rate, $2,500 in closing costs
- Mortgage B: 5.75% interest rate, $3,500 in closing costs
Option B might look tempting with the lower interest rate, but those higher fees might get you. This could mean the APR is worse in the long run.
Just remember… a higher APR means you’ll pay more over the lifetime of the loan.
APR comparison power with a loan estimate
When you apply for a mortgage, lenders have to give you a document called a Loan Estimate. Page 3 is the goldmine – it shows you the APR and breaks down how much the loan will really cost you.
And that’s where things get interesting.
Let’s go back to the two mortgages we mentioned earlier. Both cost roughly $157,000 over the first five years.
But what if you plan to sell your house in five years? In that case, Option A (with the slightly higher interest rate) is the cheaper choice thanks to those lower closing costs.
APR and the true cost of borrowing
Understanding APR is like having X-ray vision when mortgage shopping.
Compare Loan Estimates side-by-side to see the whole financial picture. Then pick the mortgage that best fits your timeline and long-term goals.