When you take out a mortgage, there’s a lot to consider. It’s not just about the down payment or the loan’s term—you need to understand the annual percentage rate (APR), too.
The interest rate is a percentage or fee the lender charges you to borrow money. It can be fixed (stays the same for the length of the loan) or adjustable (fixed for a short period; then adjusts periodically).
You can get a quick look at how much an interest rate would cost by looking at your loan in $100,000 increments. If you have a 3% interest rate, you’d pay $3,000 in interest for every $100,000 you borrow. The interest charges decrease slightly each year as you pay your mortgage balance down.
At the start of your loan, most of your payment goes toward interest, and a small part pays down the principal.
What’s a Mortgage APR?
The annual percentage rate (APR) is the interest rate plus other fees and shows the true cost of taking out the mortgage. It includes the fees you paid to the lender or broker to get the loan, expressed as a percentage of the loan amount to give you a good idea of what the loan costs.
Each APR includes different fees, but in general, here’s what to expect.
- Discount points
- Origination fees
- Underwriting fees
- Processing fees
- Document preparation fees
- Closing fees
- Prepaid interest
- Prepaid mortgage insurance
What Fees Aren’t Included?
Most fees paid directly to the lender are included, but loans may have other fees, too. Lenders must use third parties (e.g., appraisers, title companies, etc.) to complete the loan process. Here are a few of the ‘other’ closing costs you may have to pay:
- Appraisal fee
- Inspection fee
- Title search and examination fee
- Title insurance
- Recording fee
- Closing agent/notary fee
- Transfer taxes
- Attorney fee
Sometimes, even though you pay more out of pocket at closing, you may save money over the life of the loan (if you keep it for its entire term). Most people either refinance within that time or move, but if you stay in the home long enough, you should save by choosing a lower APR.
How The Loan Estimate Can Help
After you apply for a loan, lenders have to send you a Loan Estimate within three business days of receiving a completed application. The Loan Estimate has three pages and on the third page, you’ll see a ‘Loan Comparison’ section. This section tells you how much the loan will cost in five years including the principal, interest, and fees you’ll have paid. While it’s not foolproof, it can give you a basic idea of how to compare the loan.
What’s a Good APR?
Everyone wants the magic answer—what’s the best interest rate and what’s a good APR? Unfortunately, since rates change so much and APRs vary drastically by situation, it’s all relative. You can compare current APRs to one another to see if you’re getting the deal you want, but it’s best to get a few quotes and compare them for your own situation to see what works best for you.
APR is a key metric when deciding which mortgage is right for you, and we encourage you to look at the big picture. How much does the loan cost over its lifetime? Does the loan fit within your budget? Are you happy with the interest rate? The key is to find the loan that makes the most sense for you—for your wallet and peace of mind.