Monday, April 6, 2009

What is the Annual Percentage Rate? (APR)

If you are in the market for a home right now you will see some amazing offers out there from the lenders on new construction. Really low rates, of say 3.875%, but then there is that small print where it lists the APR at 3.9883%. Or perhaps they will say that the interest rate does not include tax and insurance. Whoa, Nellie!! That can be a BIG chunk of change! You may be thinking that you are getting a great deal on your interest rate and can afford more house than you thought, when in reality, you can get sucked in and then when you have an emotional investment in that beautiful new house, you find out that you really can't afford that high of a payment!

Bottom line is that you need to be aware of all the somewhat sneaky ways that lenders appeal to your senses and though they are being honest about their rates, the average person doesn't have a clue how they package all the fees associated with the loan and can be shocked when they are in the middle of this process.

So, PAY ATTENTION, PLEASE! The APR on a loan is higher than the stated interest rate on your loan because the "points" (one point equals 1% of the loan amount) that you have to pay to buy down your interest rate to this low, low, low percentage costs money! And that is usually tacked onto your loan. Then there are loan origination fees that may or may not be tacked on. How about the pre-paid interest, which is the interest paid from the date that the loan closes to the end of the month. Most companies assume 15 days of interest when they calculate this, but some companies may use any number between 1 and 30! You will also have a loan-processing fee, underwriting fee, document preparation fee and PMI (private mortgage insurance.) Sometimes the loan-application fee and credit life insurance (pays off the mortgage in the event of the borrowers death) are also added in to the APR.

Be sure you find out just what you have to pay for to get that interest rate. And don't be fooled into thinking that the low percentage is really what you will end up with. Look at that APR number! Also be sure you find out how long your rate is "locked" for. It is possible that a 10 day rate lock may have a lower APR than the lender who offers a 60 day rate lock. This whole business is confusing!

Bottom line is to check with 2 or 3 lenders when you refinance or purchase that new home. Whether you are looking to buy a new home or resale, rates are the best they have been in decades! Back in the early 80's when people were paying up to 17% interest rate to buy a home, it was unreal! When you look back to those days and even the more recent 8-10% rates, it is certainly a perfect time NOW to buy your home. How long can interest rates stay at 5-6%??

Remember to think about how much it will cost in points to buy your rate down further and factor in how long you plan on staying in your home.

Be sure you call me with all your real estate needs. If there is information you need, I can help. And if there is something I'm not certain of, I will go to the experts to get the answer!

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