Many homebuyers are often confused when they are applying for a mortgage about why they are getting two rates, APR versus interest rates, from mortgage lenders. One of the many frequently asked questions at Gustan Cho Associates is why is APR higher than the quoted mortgage interest rate. The APR is always higher than the quoted mortgage interest rates because the quoted rate is the raw true interest rate for borrowers. The Annual Percentage Rate, or APR, is the quoted interest rate by mortgage lenders PLUS the fees and costs associated with the home loan. In other words, mortgage lenders need to convert the actual costs of making the home loans to the APR. Examples of costs and charges that are included in the Annual Percentage Rate include all fees charged by the lender including origination fees, discount points, credit reporting fees, processing fees, underwriting fees, title fees, lock fees, and any other fees and charges associated with making the loan. Due to this reason, there is a difference in the APR versus interest rate quoted by mortgage lenders. The annual percentage rate is always higher than the true mortgage interest rate quoted by mortgage lenders.
Difference Between APR Versus Interest Rates
There is a difference between APR Versus Interest Rates. Residential mortgage lenders, whether they are banks, credit unions, mortgage bankers, or mortgage brokers, are required to disclose the annual percentage rate, also known as the APR. Mortgage lenders will advertise the interest rate but they also need to disclose the annual percentage rate, the APR. Difference Between APR Versus Interest rates includes the total costs associated with the mortgage loan. For example, say mortgage lender A will quote a particular mortgage rate on a $200,000 residential mortgage loan at a 4.25% interest rate on a 30-year fixed-rate mortgage loan.
How Are Mortgage Lender’s Costs Computed In APR Calculations
Let’s assume the cost associated with the origination of that loan is $2,000. Another mortgage lender, Mortgage Lender B, will quote the same rate of 4.25% on the same $200,000 mortgage loan amount. However, the cost of Mortgage Lender B is $5,000. Although both mortgage lenders have the same interest rate of 4.25% on the $200,000 loan, Mortgage Lender B will have a higher annual percentage rate, APR. This is due to the higher costs associated with the mortgage loan. The annual percentage rate, APR, is required to be disclosed by lenders so consumers can compare and shop for the actual costs of obtaining a mortgage. In this article, we will cover and discuss APR Versus Interest Rate Quoted By Mortgage Lenders.
How Mortgage Lenders Quote Interest Rates on Home Loans
Mortgage lenders normally quote the raw true interest rate on the home loan when initially quoting rates to borrowers. However, there are fees and charges involved in making a home loan. These costs are origination fees, mortgage lender fees, lock fees, discount points, credit reporting fees, processing fees, underwriting fees, and other costs.
Costs and Fees Which Are Included in Calculating APR
These costs and fees vary from lender to lender. Therefore, the best way of shopping for a mortgage is to compare the APR from one lender to another. The APR can be misconstrued as well when shopping for a mortgage. In most instances, the loan officer can over-disclose fees and costs on the Loan Estimate which can inflate the annual percentage rate. We will talk more about whether you should compare APR or interest rate when shopping for a mortgage.
Should I Compare APR or Interest Rate When Shopping For a Mortgage?
The answer to should I compare APR or interest rate when shopping for a mortgage is you should compare both. When you first apply for a mortgage, the loan officer needs to disclose the Loan Estimate. The loan estimate can be over-disclosed but not under-disclosed by more than 10%. There are times when loan officers will over-disclose costs on the loan estimate just to be safe since they do not have the actual costs. It will be wise for the loan officer to get accurate estimates for borrowers who plan to shop rates and terms of the loan.
How Much Higher Should Your APR Be Than Interest Rate on Your Mortgage?
The answer to how much higher should your APR be than interest rate is the APR will be higher but how much depends on the individual circumstances. For example, during time of market volatility and uncertainty, low credit score borrowers can be charged 2% to 4% in discounts points for credit scores under 600 FICO. 2 TO 4 discount points is almost the same as the down payment on an FHA loan. In this case, the APR will definitely be substantially higher than most circumstances.
How Are Mortgage Rates Quoted By Loan Officers?
Most consumers initially are more concerned about what the rate is for their credit profile and do not think about the fees and charges in making the loan. Fees and costs can add up to a lot of money especially when it comes to discount points. When the mortgage lender discloses the annual percentage rate (APR), it will be higher than the actual mortgage interest rate. The annual percentage rate is calculated differently than the actual percentage rate of the mortgage loan. Let’s take a case scenario where a mortgage loan applicant applies for a 30-year fixed-rate FHA loan of $200,000 at a 4.25% interest rate. The scheduled monthly payment will be $983.99.
How Is The Annual Percentage Rate Calculated?
Let’s take two case scenarios. The first case scenario is a borrower applying for a loan at Mortgage Company A for a loan amount of $200,000. The borrower is quoted a 4.25% interest rate. The cost associated with the mortgage loan of $2,000. The APR is calculated by taking the original loan amount of $200,000, less the cost of the mortgage loan of $2,000 which yields $198,000. Let’s say both mortgage loan terms are 360 months and the monthly payment is $983.33. If we calculate the APR for this loan with Mortgage Company A, you take the net loan amount after deducting the cost of doing the loan, which is $198,000. You amortize it over 360 months with a payment of $983.88. You run these figures in a mortgage calculator. The APR, annual percentage rate, will yield an APR of 4.33%.
Step-By-Step Case Scenario of Calculating APR For Mortgage Loan
We will now take case scenario two where the mortgage loan applicant applies for the same type of loan. A $200,000 loan with a 4.25% 30-year fixed-rate FHA loan of $200,000. The monthly mortgage payment is $983.99 with Mortgage Company B. The costs associated with doing the loan is $5,000 versus the $2,000 with Mortgage Company A.
How Do You Compute APR?
To calculate the annual percentage rate, APR, we need to take the original loan amount of $200,000. Then deduct the cost associated with doing the mortgage loan, which in this case is $5,000. The result is it yields $195,000. This figure is derived by taking the $200,000 and deducting the $5,000 cost associated by Mortgage Company B which the $195,000 figure is derived. Then input the $195,000 loan amount, the $983.99 payment, the 360-month loan term (30 years fixed rate term) into a mortgage calculator. You get a rate of 4.47% APR.
How The APR Helps Mortgage Borrowers Shop For Mortgage Interest Rates
The annual percentage rate, APR, is a form of giving a form of the cost associated with getting a mortgage loan in terms of an interest rate and that is what an APR, annual percentage rate is. It makes it easier for a mortgage loan applicant to shop the costs associated with a mortgage loan at a particular rate when shopping from one mortgage company to another.
Case Scenario APR Versus Interest Rate
We will now take another case scenario so our viewers can fully comprehend what an annual percentage rate, APR, is. Say a mortgage loan applicant gets a mortgage rate of 5.0% on a $200,000 30 year fixed rate loan with the monthly payment being $1,073.64. The costs associated with doing this loan from Mortgage Company A is $2,000. To calculate this APR, we subtract the $2,000 from the $200,000 loan amount at the 5% interest rate over a 30-year term ($200,000 minus $2,000 yields $198,000: input this figure in the loan amount in the mortgage calculator) with a payment of $1,073.64. Then input these figures in a mortgage calculator and it yields an APR of 5.09%. The APR Versus Interest Rate in this case scenario with Mortgage Company A is 5.09%/ Now, in this second case scenario, our mortgage loan applicant goes to Mortgage Company B.
Shopping For The Best Mortgage Rates
Our mortgage applicant applies for the same loan amount of $200,000. But gets a 4.50% interest rate which is amortized over 30 years with a principal and interest payment of $1,013.37 per month. In the first case scenario, the monthly principal and interest payment were at $1,073.64. Let’s assume the cost associated with doing the second case scenario, the 4.5% interest rate loan is $10,000 versus the $2,000 charged by Mortgage Company A on the first case scenario.
How Do You Compute APR Using Online Mortgage Calculator?
If you input the second case scenario into a mortgage calculator; $1,013.77, 4.5% interest rate, 30-year term, and $190,000 loan amount ($200,000 loan minus the $10,000 cost), it will yield an interest rate of 4.95%. The 4.95% is the APR, the annual percentage rate. Going with Mortgage Company B at a lower interest rate but 5 times the costs ($10,000 costs associated with doing the loan), 4.95% APR, will yield a better APR than going with Mortgage Company B with the 5.0% interest rate of $2,000.
Should I Go With Mortgage Company Offering The Lowest APR?
Going with the lowest annual percentage rate is not always the best fit for a mortgage loan applicant unless the mortgage applicant is planning on staying with the mortgage loan for the entire 30-year term. Remember that the APR Versus Interest Rate is that APR is the upfront costs associated with obtaining a mortgage loan which is in an interest rate form. Homeowners who are planning on selling a home in three to five years, it is most likely best to go with the lower costs associated with getting a loan. This is even with the higher APR because the chances are that they will not recoup the more upfront costs on a short term payoff mortgage loan
