These are important distinctions because some lenders may try to convince you that the monthly payment is all you need to know. In truth, you need to know how much it will cost you to “buy” this money. To figure that out, you need to know the interest rate, the costs and fees, and length of time you’ll be making payments.
The APR is what allows you to comparison-shop because it takes into account the interest rate, the fees, and cost associated with getting the money, and the length of time you’ll pay or the “term” of the loan.
For example, let’s say you are interested in buying an $85,000 new home. The home builder offers you a fixed-rate loan with interest rate of 6%. Your credit union quotes you the same mortgage terms (6%) but with an origination fee equal to 1% of the loan amount. Without looking at the APRs on the mortgages, it appears as if the home builder’s offer would be the best deal.
Next, you request the APRs from the home builder and credit union. The APR discloses the real cost of the loans, including the interest rate, costs and fees, and the length of time you’ll be making payments. You learn that the home builder did not disclose a 2% origination fee. In this example, the APR for the home builder turns out to be 6.24%; the credit union’s APR calculates to 6.15%. The cost of a mortgage with the home builder is actually higher than the cost of a mortgage with the credit union.
Nevertheless, you still need to exercise caution and comparison-shop when reviewing APRs because they can be misleading or cause further complications. This is especially the case for mortgages. You should calculate the fees over the full term of the loan or the time you actually plan to hold the loan. In doing so, you will get a more useful and realistic assessment if the cost of the loan, and the APR will help you identify the least expensive mortgage you can get.
The APR is what allows you to comparison-shop because it takes into account the interest rate, the fees, and cost associated with getting the money, and the length of time you’ll pay or the “term” of the loan.
For example, let’s say you are interested in buying an $85,000 new home. The home builder offers you a fixed-rate loan with interest rate of 6%. Your credit union quotes you the same mortgage terms (6%) but with an origination fee equal to 1% of the loan amount. Without looking at the APRs on the mortgages, it appears as if the home builder’s offer would be the best deal.
Next, you request the APRs from the home builder and credit union. The APR discloses the real cost of the loans, including the interest rate, costs and fees, and the length of time you’ll be making payments. You learn that the home builder did not disclose a 2% origination fee. In this example, the APR for the home builder turns out to be 6.24%; the credit union’s APR calculates to 6.15%. The cost of a mortgage with the home builder is actually higher than the cost of a mortgage with the credit union.
Nevertheless, you still need to exercise caution and comparison-shop when reviewing APRs because they can be misleading or cause further complications. This is especially the case for mortgages. You should calculate the fees over the full term of the loan or the time you actually plan to hold the loan. In doing so, you will get a more useful and realistic assessment if the cost of the loan, and the APR will help you identify the least expensive mortgage you can get.
