Lowest APR Isn’t Always The Best Deal
Lowest APR Isn’t Always The Best Deal, Your final decision for choosing a lender should never be based on the rate alone. The best mortgage deal isn’t always the lowest APR, When shopping for home loans, borrowers are usually most concerned with the annual percentage rate (APR) offered by a mortgage lender, rather than simply the interest rate, since the APR is meant to provide a more complete picture of how much a loan will truly cost. After all, APR calculations take into consideration all of the fees associated with loans, in addition to mortgage interest rates, which makes finding the best mortgage really easy; the lower the APR, the better the deal-right?
Not so fast.
Yes, it’s true that the APR on a home loan is a more comprehensive representation of how much that loan will cost you year-over-year. However, you should not trust the APR alone for an accurate understanding of it’s true cost. Why? There’s no standard governing which fees have to be included in an APR, essentially allowing lenders to choose what goes into the calculation, and what doesn’t. Not to mention, the calculation itself is based on a number of assumptions that often don’t hold true.
That’s why when choosing a lender to finance your home purchase, your ultimate decision should not be based on the APR alone. Learning to scrutinize a mortgage lender’s fees is crucial in avoiding being duped into paying excessive charges for a mortgage.
What Does “Annual Percentage Rate” Mean?
In the case of a mortgage, the annual percentage rate, or APR, is the total yearly cost of financing a home, expressed as a percentage of the amount financed. So for instance, say you are quoted a mortgage APR of 3.8 percent-that means if all the interest, points, and any other closing costs were added up, and then that sum was spread evenly across the entire loan term, annual payments on that total would equal 3.8 percent of the original loan amount.
It may seem a bit complicated, but the federal government actually began requiring lenders to provide an annual percentage rate alongside any advertised interest rate in order to simplify the process of home loan comparison shopping. A result of the Truth in Lending Act, the requisite to provide an APR is meant to give potential borrowers a more comprehensive benchmark by which to compare mortgages. Unfortunately, that goal is often not met.