Annual Percentage Rates – What You Need to Know
In the course of your homebuying journey, you will encounter a few terms that may be a bit confusing, especially for first-time home buyers. Annual Percentage Rates are one of those confusing terms. While it may easily be confused with interest rates, APRs are very distinctive in terms of how they are calculated. Understanding how lenders calculate them is another crucial part of the home buying process that helps borrowers make more informed decisions about handling their finances when purchasing properties. This guide will help you gain a better foothold of what APR is, how it works, and how it will affect your monthly payments as well as your finances in the long run.
When you’re buying a home, there are several challenges that may leave you scratching your head if you’re unable to understand how they work. Mortgages alone can be a tricky area to tread especially if you have no idea of the costs involved in the process. Our real estate training program helps aspiring homebuyers learn how to leverage owner financing as an alternative to get the home of their choice anywhere in Houston. This third-party owner financing gives homebuyers a 30-year amortization with reasonable interests minus balloon payments just like a bank-approved homebuyer. They also get to refinance through a conventional lender without worrying about pre-payment penalties. Explore the Houston housing market by filling out the MLS form below and let us know if you find a home in your budget and desired location. We will get you on your home buying journey in no time.
Annual Percentage Rates Defined
In one way or another, discussions about your mortgage would have you encountering the term Annual Percentage Rates or APR. The Consumer Finance Protection Bureau (CFPB) defines APR as the cost paid by borrowers yearly to apply for a loan. These costs include all the fees (such as origination fees, PMI, and closing costs) and interest rates which are expressed as percentages. The rule of thumb here is that the higher the APR, the higher rates the borrower will pay throughout the life of the loan. The Truth in Lending Act (1968) has required lenders to divulge all APR information to borrowers before a credit transaction is finalized. As such, borrowers get to compare different mortgages and loans to find the best value for their financial transactions.
Why Does it Matter?
Since APR covers all the upfront costs that usually come with the mortgage, borrowers tend to mistake it for the true amount they need to pay. As previously mentioned, higher APRs would mean higher monthly rates for the borrower, so looking for loans with lower APR will cost borrowers less especially for mortgages that take at least 10 years before full settlement. Because it’s a credit-related matter, APR rates will naturally depend on your credit score, higher credit scores would mean lower APR rates and vice versa.
To get a better understanding of how APRs work, here’s a simple breakdown of how lenders usually calculate them for your mortgage:
- Get the sum of the fees and interest to be paid throughout the loan
- Divide the figure you got by the loan’s principal amount
- Then divide that figure by the number of days indicated in the loan term
- Multiply the quotient by the number of days in a year (365)
- Multiply that again by 100 and the resulting number is the APR figure in percent
While APR allows borrowers to choose the best mortgages through APR, there is little-to-no control over what fees go into the latter. It doesn’t mean that borrowers will have no complete control over the APR, though, as there are ways to get it lower. The most practical of which is to pay the 20% down payment that could both lower APR and avoid private mortgage insurance (PMI) at the same time. There’s also the matter of getting credit scores as high as possible to have lenders lessen some of the fees that go into APR. But all in all, doing the math on your APR can help you find better mortgage offers while giving you a better understanding of how your mortgage costs will look like throughout its lifetime.
It can be relieving to know that APR can help you quantify your costs so you can be more prepared when you approach the closing table. It’s just one part of the home buying process, though, and there are other considerations to factor in, for now, you can narrow down your home buying considerations by searching for the perfect home through these available listings.
Disclaimer: Shop Owner Finance/ TL Global is not a lender. We are a real estate training agency. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.