Today more than ever it is vital to be a wise borrower, because it is vital to get the right loan, especially when it comes to your mortgage. When it comes to loans, you often hear the words interest rates and APRs and it is simple to reckon, I sort of know what those mean and go on. But, understanding exactly what they mean is imperative to successful and smart borrowing; and, it will enable you to be able to pay back your loans on time. For this reason, make sure you know the details of interest rates and APRs so you know what you are talking about when you speak to a lender.
Lost of people today assume that interest rates and APRs are the same thing because both of them charge us money and both of them are something no one really likes. But, the two items are really different and they impact your loan differently. If you do not know the differences of the two, you may not be able to pay it back on time. Therefore, before you borrow, educate yourself on the difference between the two.
Interest is something that most people seem to know because it is a lot less complicated than APRs. Basically, it is the fee we incur because we chose borrow money, and it is determined based off the amount of principal for the loan and the term of the loan. Although interest is mainly determined off the principle and term, there are other details that could affect your interest rate.
One of the largest factors that affect the interest rate is the type of loan you take out with the bank – fixed loan, ARM loan, etc. In addition, your interest rate can also vary depending on the amount of your loan versus the value of your home. Also, many times interest is evaluated based off the type of property you choose to buy. Depending on whether you are purchasing a home for a primary residence, secondary residence, or investment property, the interest rate can vary.
Most people do not realize this, but you can really “buy down” your interest rate by paying points up front. A point is equal to 1 percent of the loan you are buying; therefore if your loan was $100,000, you could “buy down” your interest rate by paying an additional $1000. When you “buy down” your interest rate you reduce the amount you will be paying in the long run and there are really possible tax benefits that come with it.
If you are not sure what your interest rate is, it is simple to calculate. You simply divide the total interest charged by the principle amount; so, if the principal was $10,000 and the interest charged was $150 your interest rate would be (150/10000) x 100 percent = 15 percent. With a mortgage the numbers may be more complicated, but the math remains the same, so you should be able to calculate it.
APR is small for Annual Percentage Rate, and it calculates the total cost of a mortgage including closing costs and interest over its entire term. The APR is reflected as a yearly rate. While it includes interest in its calculations, it is an effective way to compare mortgages because it tends to best reflect the right cost of the loan. If you overlook the APR, you might overlook some of the cost that you need to anticipate in the future.
The calculation for APR is not as simple as interest rates because it involves so many factors, but this is why it is often a better indicator for the future. It usually involves amortization schedules and complex equations, therefore you can count on an accurate rate.
When you do apply for a mortgage, do not be surprised when both the interest rate and APR are discussed. The rates will certainly vary given you credit score and the conditions of the market. Yet, those who better know the terms will make more informed decisions when it comes to borrowing.
Also, although you may not have much control on the interest rates and APRs at the time, you do have more control on the controlling costs that come with your new mortgage. These costs are usually the initial cost like closing costs and mortgage insurance. Make sure to negotiate them with your lender because they have flexibility with them.
Also, because you are more informed about lending, you should shop around. You might be tempted to go with the first person that offers you a loan, but it might not be the best choice. Research and find the best choice for you.