For those who are considering purchasing a new home, you will obviously need to speak will lenders about a mortgage. It is easy to make mistakes when it comes to borrowing or overlook the key terms you need to understand regarding your mortgage including, interest rates and APRs. Ultimately, your goal is to get a loan, however if you do not fully understand the meaning of these words, you might find yourself in a loan that you are not satisfied with, and the interest rates and APRs of your loan will definitely affect your ability to pay back your obligations. Because of this, before you speak with the lender, read below regarding the details of interest rates and APRs so you are educated about the facts of borrowing.
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. However, the two items are actually different and they impact your loan differently. If you do not understand 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 understand because it is a lot less complicated than APRs. Basically, it is the fee we incur because we decided 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 biggest 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 decide to purchase. Depending on whether you are purchasing a home for a primary residence, secondary residence, or investment property, the interest rate can vary.
One of the great things about a mortgage is that you can actually "buy down" the interest rate if you want to. You "buy down" your interest rate by paying points up front. A point usually equals 1 percent of the loan you are buying, so if your loan was $100,000, you could "buy down" five points in interest by paying $5000 dollars up front. Buying down is a great way to not only reduce the interest rate, but also reduce the amount you will pay in the long run, and there are actually possible tax benefits from doing so.
Interest is actually quite easy to calculate. You simply divide the total amortized amount of interest charged from the loan by the total loan amount; so, if your lender charges 500 a year in interest for a loan of $50,000, then the interest rate is (500/50,000) x 100 percent = 10 percent. The math is not that difficult - in fact, it is relatively straightforward when you think about it.
Moving on from interest rates, APR (short for Annual Percentage Rate) figures the total cost of a mortgage including closing costs and interest over the entire term of the loan. You often hear APR quoted in an annualized for, because APR is a yearly calculation. The nice thing about the APR is that it is a better reflection of the costs to anticipate in the future because it takes into consideration more than just your future interest. It is important not to overlook APR, because if you do, you will overlook important costs that you might not realized are coming in the future.
The calculation for APR is not as easy as interest rates because it involves so many factors, however 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 apply for your mortgage loan both rates, the interest rate and the APR are involved. The actual rate will depend on the market conditions at the given time and your credit history. Regardless of the changing rates, understanding the two terms will help you to more effectively choose the right mortgage.
Although interest rates and APRs are definitely based on the conditions of the market and you might not be able to control them, you do have some control over the controlling costs of your mortgage. These costs are associated with the initial purchase of your home and include items such as closing costs and mortgage insurance. Make sure to negotiate the price of these items with your lender.
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, however it might not be the best decision. Research and find the best choice for you.
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. However, the two items are actually different and they impact your loan differently. If you do not understand 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 understand because it is a lot less complicated than APRs. Basically, it is the fee we incur because we decided 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 biggest 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 decide to purchase. Depending on whether you are purchasing a home for a primary residence, secondary residence, or investment property, the interest rate can vary.
One of the great things about a mortgage is that you can actually "buy down" the interest rate if you want to. You "buy down" your interest rate by paying points up front. A point usually equals 1 percent of the loan you are buying, so if your loan was $100,000, you could "buy down" five points in interest by paying $5000 dollars up front. Buying down is a great way to not only reduce the interest rate, but also reduce the amount you will pay in the long run, and there are actually possible tax benefits from doing so.
Interest is actually quite easy to calculate. You simply divide the total amortized amount of interest charged from the loan by the total loan amount; so, if your lender charges 500 a year in interest for a loan of $50,000, then the interest rate is (500/50,000) x 100 percent = 10 percent. The math is not that difficult - in fact, it is relatively straightforward when you think about it.
Moving on from interest rates, APR (short for Annual Percentage Rate) figures the total cost of a mortgage including closing costs and interest over the entire term of the loan. You often hear APR quoted in an annualized for, because APR is a yearly calculation. The nice thing about the APR is that it is a better reflection of the costs to anticipate in the future because it takes into consideration more than just your future interest. It is important not to overlook APR, because if you do, you will overlook important costs that you might not realized are coming in the future.
The calculation for APR is not as easy as interest rates because it involves so many factors, however 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 apply for your mortgage loan both rates, the interest rate and the APR are involved. The actual rate will depend on the market conditions at the given time and your credit history. Regardless of the changing rates, understanding the two terms will help you to more effectively choose the right mortgage.
Although interest rates and APRs are definitely based on the conditions of the market and you might not be able to control them, you do have some control over the controlling costs of your mortgage. These costs are associated with the initial purchase of your home and include items such as closing costs and mortgage insurance. Make sure to negotiate the price of these items with your lender.
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, however it might not be the best decision. Research and find the best choice for you.
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