With mortgage rates at all-time lows, are you thinking about refinancing your home?
If so, then it’s important to comparison shop, regardless of whether you’re looking for a conventional loan, FHA loan or some other type of loan. However, if you’re like most homeowners, you may not know how to comparison shop for a loan.
The one thing you definitely don’t want to do is to shop by Annual Percentage Rate or APR. APR is supposed to represent the annual credit cost, plus interest, broker fees, points, origination fee and mortgage insurance premiums owed. While it’s supposed to help you determine the “true cost” of financing a home over a 30-year period, it’s an artificial number calculated by a formula determined by the government. However, the real “true cost” for financing is determined by adding the loan amount, the interest paid over 30 years, and the closing costs.
The 4 reasons why you don’t want to APR as a comparison tool:
1. APR is based on a 30-year loan divided into equal payments each month. Most people don’t keep a loan for 30 years.
2. Different lenders use different APR calculations – either adding or subtracting certain figures from the equation. This way a lender can manipulate an APR to look lower.
3. APR doesn’t take into account all mortgage-related fees, such a title fees, credit report fees, mortgage application fees, late payment charges, title insurance, property appraisals or document preparation.
4. While APR is useful for fixed-rate mortgages, it doesn’t work for adjustable-rate loans. APR is based on 30 years of equal payments. Adjustable-rate loans can change from year to year, depending upon the market and fluctuations in the economy. Since lenders can’t accurately predict whether the rates will go up or down, they guess. And if the APR is a guess, how can you reliably comparison shop?
Since everyone’s situation is different, comparison shopping by choosing the lowest APR may not provide you with the best loan option. Next week we'll discuss the right way to comparison shop for a mortgage.
If you’re still confused about APR, contact a knowledgeable mortgage broker. We’ll be happy to explain how APR works, as well as take a look at your individual circumstances to help you find the right loan for your needs.