At their current historic lows, mortgage rates are providing serious savings to both home shoppers and refinancers. But a low mortgage rate is only the start of what a buyer needs to consider. Each loan’s annual percentage rate needs to be considered to take into account upfront fees and other costs, financial experts say.
For example, once the additional fees are factored in, a buyer with a 30-year fixed-rate mortgage of 2.9% may actually be paying 3.1%, according to financial site NextAdvisor.
“The annual percentage rate is always confusing … it’s a broader measure of the cost of borrowing money than the interest rate,” Linda Knowlton, president of the Florida Association of Mortgage Professionals, told NextAdvisor.
Mortgages have upfront costs that are not included in the loan’s interest rate. The cited mortgage rate is the percentage of what a buyer is paying to borrow money. However, the APR factors in the interest rate and fees such as closing costs, including underwriting fees and loan processing fees. Both of these rates are expressed as a percentage.
The APR fees you pay to get a loan vary from state to state and from lender to lender, Knowlton said. Two mortgages can have the same interest rate yet drastically different APRs.
But a buyer shouldn’t shop for a mortgage based solely on APR because that doesn’t take into account how long they plan to keep the loan and stay in the home—those factors can influence the terms, financial experts say. “Looking at a loan’s interest rate or APR can help you analyze different mortgages,” NextAdvisor notes in its article. “But you can’t stop there because there are factors that those numbers don’t take into consideration.” Read more tips on understanding the differences.
“One Thing to Remember When You’re Shopping for Mortgage Rates, According to Experts,” NextAdvisor/TIME (Feb. 5, 2021)