When you start shopping for a house, the first thing a buyer will (and should) do, is shop lenders to get the best mortgage deals. The problem is, that the lender presents borrowers with a lot of loan options, and borrowers think the best and most obvious thing to do is choose the loan with the lowest APR. Don’t fall into this trap.
What is the APR?
An APR (annual percentage rate) is not the same thing as an interest rate. An interest rate is the basic percentage of your loan you need to pay the lender to take out the loan, while an APR is the interest rate plus any other lending-related fees the lender wants to add and spread out over the course of the loan. For more reading, check out: Shopping for a Mortgage; Consumer Information.
More about APRs:
1. No standard exists as to what fees can and can’t be included in the APR. Closing costs vary depending on the lender, and the APR itself does not indicate which costs are negotiable.
2. APR is calculated based on the entire life of the loan. So, if you’re only planning on living in the house for a few years, instead of the full 30 year period of the loan, you’ll be paying a much higher APR.
3. Realize that APR’s are not crystal balls. They cannot predict inflation of the economy. Even a fixed APR can’t adjust to whether you’ll refinance in the future, move out before the end of the loan, or pay off your mortgage early. With some types of loans, such as FHA and USDA, which require mortgage insurance until a certain date, the APR can’t predict when or if you’ll stop paying mortgage insurance. Read on: How to Find the Best Mortgage Rates in 2017.
4. You can’t compare one type of loan to another.
Know that you cannot believe the APR the lowest and best option just by looking at it because they work in different ways. It might be confusing to understand how to get the best mortgage deals if you can’t rely on APRs. This is a normal comment. The way to go about it is by comparing one mortgage rate with fees from different lenders at that rate, or you can compare mortgage rates with no closing costs.
You also can get a Good Faith Estimate (GFE), which will give you a very detailed list of all the fees associated with the loan. That way, you can figure out if any fees are unnecessary or too high. Always remember that you can negotiate on certain fees.
The bottom-line is to not choose the loan with the best APR. Be smart, and do your own research to make sure you’re getting the right mortgage for your needs.