For those who are considering purchasing a new home, you will obviously need to speak will lenders about a mortgage. It is easy to make mistakes when it comes to borrowing or overlook the key terms you need to understand regarding your mortgage including, interest rates and APRs. Ultimately, your goal is to get a loan, however if you do not fully understand the meaning of these words, you might find yourself in a loan that you are not satisfied with, and the interest rates and APRs of your loan will definitely affect your ability to pay back your obligations. Because of this, before you speak with the lender, read below regarding the details of interest rates and APRs so you are educated about the facts of borrowing.

For many people, we assume that interest rates and APRs are the same thing, because both of them charge us money. Yet, on the contrary, interest rates and APRs are quite different and they will definitely impact the loan you take out and even your ability to pay it back. For this reason, it is imperative to understand the difference between to two so you know what you are getting yourself into.

Interest is something that most people seem to understand because it is a lot less complicated than APRs. Basically, it is the fee we incur because we decided borrow money, and it is determined based off the amount of principal for the loan and the term of the loan. Although interest is mainly determined off the principle and term, there are other details that could affect your interest rate.

Some specific factors usually affect interest including the type of loan you decide to take out - fixed loans, ARM loans, etc. In addition, your mortgage interest rate also considers the amount of your loan versus the value of your home. Lastly, sometimes, interest is factored based off the type of property you are purchasing. The interest will probably be different if the home is your primary residence, a second home, or an investment property.

Most people do not realize this, but you can actually “buy down” your interest rate by paying points up front. A point is equal to 1 percent of the loan you are buying; therefore if your loan was $100,000, you could “buy down” your interest rate by paying an additional $1000. When you “buy down” your interest rate you reduce the amount you will be paying in the long run and there are actually possible tax benefits that come with it.

Interest is actually quite easy to calculate. You simply divide the total amortized amount of interest charged from the loan by the total loan amount; so, if your lender charges 500 a year in interest for a loan of $50,000, then the interest rate is (500/50,000) x 100 percent = 10 percent. The math is not that difficult - in fact, it is relatively straightforward when you think about it.

Moving on from interest rates, APR (short for Annual Percentage Rate) figures the total cost of a mortgage including closing costs and interest over the entire term of the loan. You often hear APR quoted in an annualized for, because APR is a yearly calculation. The nice thing about the APR is that it is a better reflection of the costs to anticipate in the future because it takes into consideration more than just your future interest. It is important not to overlook APR, because if you do, you will overlook important costs that you might not realized are coming in the future.

Since APR considers all costs for the future other than the principle, not just the interest rate, it is usually a higher rate than the interest rate. The calculation for APR is a little more complex than the simple calculation for interest rates and it usually involves an amortization schedule and a more complicated equation. However, because of this APR is a good prediction of future costs.

When you apply for a mortgage for your loan will involve both rates: the interest rate and the APR. Obviously, given the current market conditions and your credit history, you should anticipate the rates to vary. However, if you understand the differences of the two rates, you will be better equipped to choose the right mortgage for your new home.

Also, although you may not have much control on the interest rates and APRs at the time, you do have more control on the controlling costs that come with your new mortgage. These costs are usually the initial cost like closing costs and mortgage insurance. Make sure to negotiate them with your lender because they have flexibility with them.

Lastly, now that you are more informed, do not jump the gun and go with the first offer. Shopping around is always wise. Find the lender that best fits you.

This entry was posted on Saturday, January 9th, 2010 at 3:42 am and is filed under Mortgage Loan Refinance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.