What's in this article?
To find a house and secure a home loan are two of the biggest financial decisions a person is likely to make.
Understanding the paperwork and rates is a mountain that needs to be climbed by every new home buyer.
Fortunately, the team at Homefinity has the expertise and knowledge to answer any questions for a new homebuyer. They will have and guide you through the process.
The difference between APR and interest rates is something that every buyer should know.
Let’s break down what each term means and how it affects your homebuying experience.
What is APR?
APR is the annual percentage rate for the loan.
Mortgage APR is represented by a percentage on the monthly bill and includes the interest rate, discount points, and fees charged by a lender.
APR fees includes the following:
Also known as mortgage points, these fees are paid directly to the lender in order to lower the interest rate. Typically, paying the lender 1% of the loan amount will lower interest rates by .25%.
Buyers who know they will be in the home for the majority of the loan can save money by “buying down the rate” of their loans. Folks who know they won’t stay in the home for the length of the mortgage loan may want to pass on discount points.
This is the fee charged by the lender to process a loan application. They are generally between .5% and 1% of the mortgage loan.
The interest rate paid from the date the loan closes to the end of the month. The closer to the end of the month the loan closes, the less interest rate paid for that month.
Mortgage underwriting fee
The fee lenders may charge to cover the cost and underwriting, processing, and closing the mortgage loan. Lenders are sometimes willing to negotiate this fee.
Mortgage broker fee
If buyers work with a mortgage broker, this is the fee paid to them. Typically 1%-2% of the loan amount, it pays for the work the mortgage broker does. This includes gathering documents, pulling credit history, verifying income and employment. Then you’ll work with the bank underwriter, the closing agent, and the real estate agent to ensure a smooth transaction.
Mortgage application fees
This fee is charged for doing business with lenders. This non-refundable fee is pretty much a credit check to ensure the lender that the buyer can make payments. If a buyer is certain they have fantastic credit, they should shop for lenders willing to waive this fee.
There can be more fees rolled into the APR, like legal fees, certain closing costs, and transaction fees. A Homefinity loan officer can answer all questions concerning APR and mortgage fees.
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What is an interest rate?
Simply put, the interest rate is the cost of borrowing from a lender and is a percentage of the principal, or the amount loaned. The lender takes an overall picture of the borrower’s financial health and applies a percentage of the loan to mitigate risks.
Interest rates are determined by both unique factors from borrower to borrower and the overall health of the financial market.
Rates can be set in stone, called fixed rates, or can be on a sliding scale, known as variable rates. These are the two most popular rates in the mortgage world.
This is the most common rate and it’s exactly what it sounds like. Once the loan contract is signed, the fixed rate will never change. The advantage of this type of interest rate is that you’re protected from sudden changes in your monthly payment due to interest rates changing in the market.
The interest in this loan is not fixed and will fluctuate due to a variety of factors during the lifetime of the loan. A common type of variable rate mortgage is an ARM, or Adjustable Rate Mortgage.
ARM loans charge a borrower with a fixed rate for a set number of years, then a variable rate for the rest. For example, in a 5/1 ARM loan, the borrower would pay an agreed upon fixed interest rate for the first five years and then a rate that would change for the next 25 years.
The rate changes as the mortgage index changes. Served by several benchmarks, such as the prime lending rate, Secured Overnight Financing Rate (SOFR), and the Monthly Treasury Average, it’s a gamble some borrowers choose to make.
Borrowers who believe rates will fall in the future may want to look into variable rate loans. A Homefinity loan officer can walk borrowers through current rates and answer any questions concerning ARMs.
How are interest rates determined?
A combination of market factors, such as inflation, the bond market, the rate of economic growth, and general current economic health all affect interest rates. As well as personal factors, like credit score, income, debt, and the property’s location.
How can borrowers get the best rate?
Borrowers should do their best to foster their own good economic health, in addition to shopping around for lenders offering the best rates.
One of the first things a lender does to determine if they want to do business with a borrower is to uncover their credit history and score. There are ways to help make a credit score sparkle in the months leading up to applying for a loan.
Knowing your credit score and the information that lenders will use to determine not only approval, but interest rates and APR, is an important step for home buying.
Borrowers should order their own credit reports and examine them for high balances, accounts in collections and past due accounts, and potential criminal activity, like unknown loans. The three major credit bureaus each offer one free report per year.
If possible, pay down all the balances and make all accounts current to ensure the lowest interest rate and APR.
Homefinity is here for you
A good credit score and financial stability are two important factors to buying a home. But working with a reliable lender that you can trust will also ensure success.
Buying a house for the first time comes with a unique set of challenges, questions, and goals. Whether you want a fast and convenient process or in-depth guidance, you need a loan officer who can help you move through the process at your pace.
The team at Homefinity has decades of combined experience. From start to finish, we offer friendly, honest recommendations and tested, analytical knowledge to get you the best custom rates possible.
A Homefinity loan officer will be able to answer any questions concerning mortgage rates, APR and interest rates. Reach out to them today!