Mortgage rates at their current record lows offer some serious savings for both home buyers and people looking to refinance.
But experts say a low mortgage rate is only one part of the equation, as people also need to consider the loan’s annual percentage rate to take into account other costs such as upfront fees.
The financial website NextAdvisor notes that once additional fees have been factored in, a buyer with a 30-year fixed-rate mortgage with 2.9% annual interest may actually be paying at a rate of 3.1%. Buyers need to be aware of this, experts say.
Linda Knowlton, president of the Florida Association of Mortgage Professionals, told NextAdvisor that the annual percentage rate is confusing for many people. “It’s the broader measure of the cost of borrowing money than the interest rate,” she said.
The issue is that mortgages come with upfront fees that aren’t included within the interest rate. The cited mortgage rate refers to the percentage of what the buyer is paying to borrow the cash. But the APR factors in the interest rate together with the fees, which including closing costs, underwriting costs and loan processing fees. The confusion arises from the fact that both the interest rate and the APR are expressed as a percentage.
APR fees can vary from lender to lender and also from state to state, Knowlton pointed out. So two mortgages might have the same interest rate, but come with a different APR.
Experts say buyers shouldn’t consider the APR alone though, as it doesn’t take into account how long they plan to keep the loan and stay in their home for, and those factors can also influence the overall terms.
“Looking at a loan’s interest rate or APR can help you analyze different mortgages,” NextAdvisor advises. “But you can’t stop there because there are factors that those numbers don’t take into consideration.”